By on February 17, 2009

Hedge funds are busy seeking painful revenge on Porsche. According to the Financial Times, they “have gained more ammunition for their legal complaints against Porsche after the German sports carmaker revealed it had made almost $514M by placing bets on several German blue-chip shares, in addition to last year’s controversial trades in Volkswagen options.” Why is this tidbit consequential? Because Porsche had always maintained that all they had in mind was the innocent takeover of Volkswagen.

In 2008, Porsche had higher profits than sales. They made a profit of €6.8B from VW option trades and about €1B from selling sports cars. Last October, Porsche disclosed that it controlled, through direct holdings and options, 74 percent of Volkswagen. This catapulted the VW share price above the €1000 mark and inflicted large losses on hedge funds and other investors that had placed bets on a falling VW share price.

Last week, transcripts of a Porsche shareholder’s meeting in January were released. In this meeting, Porsche CFO Holger Härter said: “We have also arranged share options to generate liquidity. The underlying shares were referring to Dax companies and not to Volkswagen.”

Says the Financial Times: “His revelation undermined Porsche’s claims that its option trades in VW were driven by industrial logic as it built a stake in Europe’s largest carmaker.” Which adds extra firepower to the ammo dump being amassed.

Hedge funds have already filed legal complaints against Porsche at several courts in Germany. Bafin, the financial watchdog, is investigating possible market manipulation of VW shares. Porsche denies allegations that it manipulated VW’s share price. German prosecutors will not decide whether to launch a formal investigation into the hedge funds’ complaints until Bafin has completed its probe.

Porsche’s Wendelin Wiedeking said the company was simply using options to hedge against a rise in VW’s share price: “We are not speculators—we never have been and will never want to be.” His CFO said otherwise: The VW option trades and the revelation of further trades in other Dax shares make Porsche indeed look like a speculator.

In a separate article, the Financial Times says that there exists “some fear that the company’s risky options strategy could blow up in its face. One fear is that the owners of Porsche, the Piëch and Porsche families, might one day follow the fate of Schaeffler and Merckle, two German industrial families that pursued high-risk strategies and could soon lose control of their business empires.”

Max Warburton, an analyst at Bernstein Research, says: “Porsche had €31B in stock options liabilities on its balance sheet in July 2008. There is a huge amount of nervousness about this around.”

Holger Härter, Porsche’s chief financial officer, has pointed out that the Volkswagen stake is valued at €117 a share in the company’s books, way below its current share price of about €250. If VW’s share price may one day depart from its takeover-inflated value and come down to levels suffered by other carmakers, Porsche will go up in smoke. Hint: VW does not rule out a loss in the first quarter.

The next risk is Porsche’s ability to refinance a €10B syndicated loan that expires at the end of March.

And by the way: No further gains from VW options trades are expected. It could be a rough year for Porsche.

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19 Comments on “Porsche’s Peril: Revenge Of The Hedgies...”


  • avatar
    PeteMoran

    How did we arrive here? Leverage, and the GAMBLING in leverage, will kill off otherwise viable employers and with it value-adding business around the world.

    They’ll be pitch forks and lit torches any minute and not soon enough!

  • avatar
    Qwerty

    Hedge funds complaining about other entities manipulating stock prices. LOLZ. The injustice of it all. Only hedge funds should be allowed to do such a thing.

  • avatar
    John Horner

    Does Germany have insider trading laws like those in the US? In the US it is illegal to make any trade if you do so while in the possession of material information unknown to the public.

    Behind every great fortune there is usually a great crime.

  • avatar
    IGB

    Is this the pot filing suit against the kettle for being black?

  • avatar
    johnthacker

    The way that Porsche got the hedge funds has to do with a loophole of sorts in German stock disclosure law. Porsche was required by law to disclose stock and stock options it held in VW. However, German law did not require Porsche to disclose options and stakes it held in banks that in turn held options in VW, much less some complicated contracts whereby they could force banks to sell or vote VW shares as Porsche wished.

    The result was that public disclosures showed Porsche controlling much less of VW than it really did. Hedge funds thought that there were a lot more free VW shares out there. Betting on the VW stock price to go down seemed reasonable, given its inflated value. But it turned out that there were more put options out there by hedge funds than there were free floating shares.

    After Porsche revealed that there weren’t enough free shares to go around to cover all the hedge funds’ put options, hedge funds were forced to acquire shares to make their put options good. This caused the share price to jump.

    In short, Porsche essentially cornered the market in VW shares when hedge funds had option contracts that forced them to purchase VW shares at some point to cover the puts.

  • avatar

    How about stopping all this gambling and going back to, uhmm, making cars?

  • avatar
    Jared

    It is rather difficult to feel sorry for hedge funds that got burned by someone playing their own game better than they do.

  • avatar
    wsn

    PeteMoran said:
    How did we arrive here? Leverage, and the GAMBLING in leverage, will kill off otherwise viable employers and with it value-adding business around the world.

    No, gambling is not how we arrived here.

    Rewarding gamblers by bailouts is.

    And next time around, there will be more gamblers.

  • avatar
    johnthacker

    The hedge funds got in trouble with Porsche and VW for the same reasons that the financial industry got in trouble here.

    They “knew” that VW shares “had” to go down… unless some incredibly rare event happened; also, they trusted the ratings and laws to force disclosure by Porsche of all their indirect holdings as well.

    Whereas with the other financial crisis, people and banks “knew” that house prices “always” went up… unless some incredibly rare event happened; also, they trusted the legally mandated ratings from the ratings agencies to never be inaccurate about those AAA-rated mortgage backed securities.

  • avatar
    Landcrusher

    Seriously? Hedge funds suing over market manipulation? That is so rich.

  • avatar
    netrun

    In order to spur sales and get people to stop talking about option contracts at Porsche, they should have a massive sale. Since auto sales make up such a small percentage of the profit, it shouldn’t hurt the bottom line.

    The sale should be so massive that it generates a lot of outside interest. I envision people lined up to sit in a 911. A four week waiting list to drive one for 15 mins.

    I’m thinking a 75% off sale. How ’bout it? :)

  • avatar
    Lumbergh21

    Assuming it is accurate, John Thackers description of what happened is greatly appreciated for its simple straight forward explanation of what happened. It also shows the underhanded nature of what Porsche did, and I hope they get nailed for it the same as I would hoope any manipulator of stock prices would get nailed. You could say that the hedge funds weren’t forced to gamble on VW stock going down, but the position they took was reasonable based on the information available. That Porsche provided false information to put them in a bad position and Porsche in a good position should be punished.

  • avatar
    tom

    Porsche didn’t provide false information.

    They didn’t disclose their cash settled options though as that is not required by the law.

    Cash settled options are basically a bet on rising prices. However, banks usually hold stocks equivalent to the cash settled options in order to hedge the risks. So that’s how Porsche cornered the market.

    So basically what happened was that Porsche bet on rising prices, while the hedge funds bet on falling prices, the combination of which lead to a shortage of stocks.

    The short sellers borrowed stock from the banks that gave out cash settled options and sold them. Porsche then bought those stocks/got cash settled options.

    So when it was time for the hedge funds to return their borrowed stocks, the banks which gave out the cash settled options to Porsche held VW stock, while the hedge funds that bet on falling stock had to buy stock which wasn’t on the market anymore.

  • avatar
    Diewaldo

    At least one life was taken by Porsche. Adolf Merckle lost a few billion and threw himself in front of a train.

  • avatar
    Jared

    At least one life was taken by Porsche. Adolf Merckle lost a few billion and threw himself in front of a train.

    Excuse me? Did Porsche hold a gun to his head and make him bet billions on the price of VW stock? Did Porsche push him in front of that train?

    No and no. He was a big boy. He bet more than he could lose. And when he lost, he took the easy way out and killed himself.

    It is a tragedy for the family, but Mr. Merckle alone is responsible for his actions.

  • avatar
    James2

    How about stopping all this gambling and going back to, uhmm, making cars?

    Rob, they really shouldn’t. When they do, all we get is a monstrosity like the Panamera.

    Instead of claiming that profits from the Cayenne allow them to keep building 911s, since it’s clear from this article that they don’t really make that much money, they should keep on keeping on –until the authorities say Achtung!

  • avatar
    wsn

    Jared said:

    Excuse me? Did Porsche hold a gun to his head and make him bet billions on the price of VW stock? Did Porsche push him in front of that train?

    Madoff didn’t hold a gun to anyone’s head. Why is he prosecuted? Is this a dictatorship?

  • avatar
    Landcrusher

    WSN,
    Your argument makes no sense at all. I suspect you didn’t think it all the way through?


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