It was too cold for the usual game of boules, too early for a celebratory meal
at their favourite restaurant, the Friedrich von Schiller, but a good day to
prepare the most dramatic move in the history of the German motor industry.
It was the moment, however brief, when Volkswagen, maker of the People's Car,
was valued at €287 billion, making it the world's most valuable company,
surpassing Exxon, the American oil giant.
At 9.39 on Tuesday morning Volkswagen shares touched €1,005 (£797). The rise
sparked billion-euro losses for hedge funds and the most bizarre takeover
twist in German corporate history.
Wendelin Wiedeking, the chief executive of Porsche, and Holger Härter, his
finance director, are neighbours in the little South German town of
Bietigheim-Bissinghem, so it was easy to meet and agree on the phrasing of
the announcement on Sunday that sent VW shares soaring and short-selling
hedge funds fleeing for cover.
There has been little Schadenfreude in Germany about the pasting handed out to
the funds - market wisdom is that they took a €30billion loss.
Rather, there is nervousness in the executive suites of Dax companies that
Germany will gain a reputation for casino capitalism, and concern, too, in
Porsche that its image as a steady Swabian car manufacturer, maker of the
stockbrokers' favourite set of wheels, might have taken a serious knock.
Certainly traders were still fuming yesterday.
The announcement by Porsche that it had cash-settled options giving it almost
75 per cent of VW by next year may have caught the short-sellers on the hop,
but that was never the prime intention.
“It is the funds themselves that are responsible, with their huge bets on a
fall in VW shares that never happened,” said a Porsche spokesman.
What had actually happened was the logical next step in the most enduring
struggle in the European car industry: the tortured attempt by Ferdinand
Piëch, grandson of Ferdinand Porsche, who set up Hitler's project to build a
Car for the People, to preserve the Piëch legacy.
In principle he approves of the Porsche takeover of VW - both he and Mr
Wiedeking have been transformed into billionaires in the past few weeks -
and sees it as a legitimate way of overtaking Toyota.
But Mr Piëch, 71, wants the future merged company to stay true to its
engineering roots, to be at the forefront of automative design rather than a
big- hitter on the financial markets.
Porsche, though, has become, in the words of Thorsten Jacobs, a car industry
analyst, “an investment bank with a car showroom attached”.
Mr Härter, the brains behind the takeover of VW, has displayed an
extraordinary talent for speculative financing. By business year 2006-07
Porsche was earning four times more through financial operations than
through the sale of cars. For this business year, it looks like it will
record higher pre-tax profits than turnover. And Mr Wiedeking has become the
highest-earning executive in Germany, on €60 million a year.
On September 12, Mr Piëch launched a last stand, backing VW workers who wanted
to stop Porsche from closing any VW operations. Soon, the industry was full
of leaks that Mr Piëch, enraged at the apparent arrogance of the Porsche
takeover team, was set on ousting Mr Wiedeking. The Porsche chief said
nothing in public.
Quietly, though, he and the finance director shifted the balance of power.
Under the original takeover plan, Porsche would have acquired more than 50
per cent of VW shares by the end of November.
The time- table was accelerated. Making shrewd use of cash-settled options, Mr
Härter ensured that Porsche had almost 75percent of the shares in the bag by
October - enough in theory to call an emergency annual general meeting and
push Mr Piëch into retirement.
The markets got wind of the interest and VW shares, in the week beginning
October 6, broke records. On October 18, the Porsche clan met. Mr Piëch was
presented with reality: he had to put up with the terms of the Porsche
management or face a life on the margins of the company.
“This truly marked the autumn of the patriarch,” one industry insider said.
“The car world has changed beyond recognition.”
A few days later, Mr Piëch said that he no longer accepted the VW workers
proposal to curb Porsche powers within VW. And that he fully backed the work
of Mr Wiedeking and Mr Härter.
That support must have grated. Perhaps it was the final surrender for Mr
Piëch, whose last years have been buffeted by court cases against
worker-directors on charges of sleaze and sex in VW.
By the weekend it was plain to Mr Wiedeking and Mr Härter that they had to
signal to the world that a 75 per cent holding was more than a vague dream.
The point was not just to inform the markets, but also to register that the
battle with Mr Piëch had been won. Mr Wiedeking had tried to convey the
message at the Paris Motor Show earlier in the month: “Our task now,
together with the colleague Martin Winterkorn (VW chief executive), is to
create added value and attack Toyota.”
Nobody spotted the sub-text: that it was now pointless to speculate that
endless management rows could delay the merger.
So Porsche guilelessly released its statement last Sunday. On Tuesday, when VW
shares broke through the €1,000 ceiling, traders clapped and hooted.
But not Mr Wiedeking. Perhaps he is busy trying to mend the broken china, to
undo the damage wrought in what remains the most extraordinary of German
takeovers.
The ups and downs of short-selling
Christine Seib
Short-selling is relatively simple: hedge funds sell borrowed stock in the
hope that the share price will fall, enabling them to buy the stock back
more cheaply, return it to their prime broker, pocketing the difference.
The system fails when, as with Volkswagen, the stock shoots up rather
than plunges. Hedge funds are left with two options: buy the stock back at
the inflated price and accept a loss; or keep the loan open and hope the
stock falls again.
The second option could be a winner if the hedge fund is correct in its
assumption that the stock will eventually fall. However, it can be expensive
in the interim.
In order to borrow stock, hedge funds provide collateral, usually 105
to 120 per cent of the value of the stock borrowed. If the shares rise in
value while the loan is open, the fund must provide more collateral.
The first option is not fool-proof. In a case such as VW, there is a
shortage of stock for sale, which means some funds may simply be unable to
buy sufficient shares to satisfy the prime broker.
Germany’s exchanges yesterday reduced the weighting of VW as part of
their indices, which meant that tracker funds had to sell some of their
shares in the car-maker to keep their holdings in proportion to the index.
In order to do so, the trackers demand that the prime brokers return their
stock — known as a recall.
For the hedge funds that had hoped to ride out the share price rise, a
recall is a disaster because it forces the fund to crystallise its losses
against its better judgment.
