Porsche, VW & Hedge Funds: How VW Ended Up Owning Porsche
Hedge funds lost billions, and VW became the most valuable company in the world while Porsche tried to take them over.
Most of us love Porsche for the vehicles they produce. They have made some of the greatest cars ever. From the early years to the not so early years, Porsche has made exceptional vehicles. This continues to this day. However, there was a period of time when it looked like Porsche would cease to exist. By 1992 Porsche was on the brink of bankruptcy.
They turned their fortunes around and became so profitable that they attempted to take over VW which was many times larger than they were. And that attempt ended with VW actually owning Porsche. It was quite a wild swing over the course of about 15 years or so. Some people would call Porsche the hedge fund that sold cars on the side. This is why.
Nolan Sykes produced a video on his Donut Media YouTube channel which examines this interesting time in the history of Porsche and VW. It involves not so much the vehicles produced but stocks and hedge funds and German law. If you think a 911 Turbo is quick, just wait until you see how quickly the fortunes of these companies can change. Porsche was in deep trouble when Wendelin Wiedeking took over as CEO.
He revitalized Porsche by introducing a slew of wildly successful products. The Cayenne, the Boxster and the 996 generation 911 made Porsche profitable. Ironically, these are the very models that some Porsche enthusiasts love to hate on. In any event, by 2005 Porsche was in the black and VW was the one struggling. Now things get interesting.
Wiedeking had his sights set on taking over VW. Although that is not how he played it out in public. In 2005 Porsche announced it had bought 20 percent of VW. The official word at the time was that it was not to take VW over but to help them stay independent. Stock prices remained stable, but eyebrows were raised. “It was pretty suspicious that Porsche was dumping billions of dollars into one of the least profitable car companies in Europe.” Says Sykes.
In 2006 Porsche increased their stake in VW to 25 percent. All while maintaining that they were not taking over VW. In 2007 Porsche had a 31 percent stake in VW. At this point the share price of VW had doubled since Porsche had began to buy it up.
By 2008 Porsche was authorized by their board of directors to acquire 50 percent of VW. “Volkswagen, who was so financially weak at that point, was growing in value because of Porsche. Hedge funds were salivating at this opportunity to short sell. They just knew it was bound to go down at some point.” Explains Sykes. The hedge funds took out loans to short VW. However, by October of 2008 Porsche owned in outright stock and stock options 74 percent of VW.
Twenty percent was locked up by the German government and another 5 percent was in index funds. Time for the hedge funds to panic. There were not enough shares left on the market to cover what they intended to short. So panic buying began. “The severe scarcity of the shares compared to demand skyrocketed the share prices from $200 to $1,000. In a single day.” Says Sykes.
VW was now the highest valued company in the world. Porsche made about 11.5 billion dollars in just a couple days. If this all sounds familiar to you, it is very similar to what went on with GameStop this year. Think of GameStop as VW and Porsche as the Reddit investors. So, Porsche just made a ton of money, and they own a large chunk of VW so them completing the takeover is basically in the bag, right? Not so fast. Roadblock number one was the “Volkswagen rule.”
This rule gave any government party that owned 20 percent of VW veto power within the company. That is exactly what happened. The government was not going to let Porsche acquire VW. The second roadblock was that Porsche took out massive loans to buy the VW stock. This resulted in them racking up 13 billion in debt and the banks were calling.
This is where the story takes another strange turn. Porsche went to the country of Qatar and found some wealthy investors that would loan them the money. But the German government stepped in again and blocked the deal using their veto power. Ferdinand Piech the Chariman of VW sided with the government. He then convinced the investors from Qatar to send the money to VW instead of Porsche.
This left Porsche in a vulnerable position. Piech suggested a merger of Porsche and VW with Porsche operating under the VW name. It is not a bad place to be. Both companies have benefited and now the likes of Lamborghini, Bentley and Audi also operate under the VW umbrella. It was a long road to get here, but with the epic cars Porsche is producing right now none of us can really complain.
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