By on November 3, 2008

So you thought Porsche financed the VW takeover by foisting overpriced floormats and trucks on their well-heeled buyers? Yesterday’s issue of Die Welt, Germany’s conservative newspaper, thinks different. They undug the dirt on Porsche’s takeover-machinations of Volkswagen. It’s a story that makes Cerberus look like a frisky puppy.  It’s an account that makes banks and hedge funds look like morons.

In March 2005, Porsche Chief Wendelin Wiedeking, and his clever CFO Harald Härter traveled to the picturesque Salzburg. They presented to the Porsche/Piech clan their strategy to subjugate the auto giant Volkswagen. The cunning plan: Porsche buys VW for no money. Make that: Porsche bamboozles hedge funds– supposedly the smartest of the smart– into unwittingly forking over the cash.

The Porsche/Piech clan liked the plan, and it was set in motion. Unspoken, but obvious: that meeting included-– virtually at least-– Ferdinand Piech. As every TTAC B&B knows, Ferdinand Piech owns a good chunk of Porsche, and serves as the head of Volkswagen’s Supervisory Board. Did he exercise the powers vested into him, and warned the shareholders of VW of the machinations? We don’t think so.

Using the whole arsenal of arbitrage, swaps, puts, straddles, fraptions, and butterflies, Porsche drove the VW share up, while the hedge funds, fixated on the fundamentals of the flopping auto market, sold short. Porsche used every available loophole of the German law: A swap for instance doesn’t need to be registered. Porsche owned more and more of VW without anyone noticing. Porsche/Piech controlled the news. They could buy low, sell high, and with leverage that would have put the awe in Archimedes. The proceeds were used to buy more stock (to move it) and more options (to make more money.)

Over the years, Porsche kept people guessing why they would invest into VW at all. Three years ago, Porsche announced to an astounded world that they bought 20 percent of VW’s stock. They positioned themselves as the benign white knight that kept VW’s vestigial virginity from being gang-raped by rabid Auslandskonzerne (foreign corporations.) If anybody asked where this would lead, no answers followed.

Did Porsche want just a small chunk of VW? Or a blocking minority of 25 percent? Or, gasp, would they go for 51 percent? When questioned, Wiedekind assuaged the markets: “We are not going for a blocking minority.” A few months later, Porsche had more than 25 percent. Reminded of what he had said before, Wiedekind smiled.  He had not lied. A blocking minority was not what they had in mind. They wanted the whole kit and caboodle.

In the meantime, Porsche conducted the orchestra of financial instruments like a Kapital-Karajan. Their financial fiddling did not remain completely unnoticed.  Says the Economist, a bit belatedly: “The risks of short selling should have been apparent to the brightest hedge-fund managers in Mayfair and Greenwich because of widespread suspicion that Porsche, a dab hand in currency-derivatives markets, was also mucking about with options on VW stock.”

Indeed, Morgan Stanley warned clients on October 8th to refrain from playing “billionaire’s poker” by betting against Porsche. Max Warburton of Alliance Bernstein correctly predicted Porsche could make billions by squeezing short-sellers of VW’s shares. Porsche’s answer? “A fairy-tale.”

Likewise, Porsche’s balance sheet got curiouser and curiouser: In fiscal 2005/2006, Porsche showed a profit of  €2.1b before tax, and of that, a whopping €900m were “non recurring items” – an euphemism for gains from speculation. “Currently, Porsche makes only a quarter of its profits from building its luxury cars,” says Die Welt, “and it won’t be long before their profits exceed their annual sales.” Which stood at €7.4b as of the last fiscal year.

The stock yo-yo of last week may have brought Porsche close, if not beyond that elusive target. In an all-out final attack, Porsche drove the hedgies into panic-buying, psyched funds managers into loading up on VW at all cost. Then, Porsche sold their options and made an even bigger killing. With an utter deficiency of shame, they spun even that as “providing a greater free-float to a constrained market.”

The funny thing: Porsche may get away with the murder of the hedgies.  Actually, in Germany, Porsche’s backs are being slapped with Schadenfreude.  One CEO of another company that is part of the DAX, wisely said off the record: ”How Porsche engineered the financing of the VW takeover is exemplary. Ingenious!”  Ulrich Hocker of the Deutsche Schutzgemeinschaft für Wertpapierbesitz  (German Protective Association of Shareholders) grins: “The losers are no small stockholders. This time, it was professionals who should have known the risks.”

The losers see it different: “Stock manipulation”  grumbles DWS, the fonds of  Germany’s banking giant Deutsche Bank. Unless totally dead, losers have a tendency to get even.  Sneers the Economist: “Porsche may struggle to sell 911s to hedge-fund managers for years and years to come.” That may be the most benign revenge of the many that are being hatched in the hedges.

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31 Comments on “Editorial: How Porsche NSFWed the Hedge Funds...”

  • avatar

    I was a little bit underwhelmed when Automobile Magazine named Wiedeking their 2006 Man of the Year. I though great, he figured out how to make money selling low-volume sports cars: by selling higher volume SUVs. Bah!

    This story changes my whole opinion of Wiedeking. Financial genius! He played the game and won. Bravo!

  • avatar

    I don’t know anything about German law with respect to the fiduciary responsibilities of a CEO, but if any of this is true it sure sounds like Dr. Piech is guilty of perpetrating a fraud on the stockholders that he is supposed to be beholden to. But maybe that’s all cool in der Bundesrepublik Deutschland…

  • avatar

    I don’t believe Piech was in on it, as he opposes the Porsche takeover. Remember, there are two feuding sides in the Porsche family, the Porsche and Piech sides.

    But a really good editorial, one of the best I’ve read here.

  • avatar

    The Piech opposition -it didn’t last long – could have been part of the charade. To play that game effectively, you need wild swings.

  • avatar
    John Horner

    Damn it, now you have gone and given away the plot of Ocean’s Fourteen!

  • avatar

    Sneers the Economist: “Porsche may struggle to sell 911s to hedge-fund managers for years and years to come.”

    Yes, now that Porsche has had their way with the hedgies they’ll be selling them Golfs instead. Awesome.

  • avatar

    Regardless of Piech’s actions I think it’s awesome that a company known for MANUFACTURING a high-quality product managed to jailsex a bunch of hedge fund scum at their own game.

    Kudos to Porsche!

  • avatar

    Yes, well, its great that Porsche is sucking the money out of the hedge funds that have sucked their money out of the rest of us. Meanwhile the Panamera looms.

  • avatar

    I think its safe to assume very very few mom and pop 401(k)s short-sell stock. That being the case, Porsche totally stole my idea of playing the currency and options markets to bankrupt hedge funds so they have less cash with which to pump up the next asset bubble.

  • avatar

    The brilliance of this plan was its subtlety. A very German approach.

  • avatar
    johnny ro

    I’m with Rochskier on this.

  • avatar

    So, Porsche is going down the road that GM traveled; it is no longer a car company but a financial concern. The current products reflect that change….

  • avatar

    I think it’s awesome, that an auto manufacturer like Porsche beat the hedge funds at their own game…this year, Porsche’s profit will be higher than their total revenue…when has something like that ever happened…well, never atually…

  • avatar

    @samir: Being German myself, I can testify that we were never known for subtlety. Thorough? Yes. Subtle? Nein.Sorry? Often. Which makes this plan even the more ingenious. And the Robin Hood angle! A spinmeister’s dream. Rob the rich, give to the poor. What’s missing in that picture?

  • avatar

    The brilliance of this plan was its subtlety. A very German approach.

    I agree with Bertel; Germans have been stereotyped as a lot of things but Subtlety is not one of them

    ie the Schleiffen Plan of 1914.

  • avatar

    Anyone that sticks it to the pigs in the City is a hero.

  • avatar

    Hedge Fund Manager will be the boogeyman of the future – and seeing them sunk today is a joy. Value destroyers the lot of them.

    I’ve been having fun following the German papers on this story – the comments run the field from disbelief to glee to worry (“Is it legal?”)

    In fact, what we have been privy to, was the final set-piece confrontation in a battle that was long in the brewing, with elements brought into position surreptitiously, before the order to attack was given, as the markets went haywire a short while ago.

    Is this a good thing? If it gives Porsche/VW the clout it needs to preserve the integrity of the brands in the portfolio – then yes, it is a good thing. We have seen how the world of finance has contributed to the destruction of other brands, and now we got an exemplary case of Aikido, using the strengths of the attacker against himself.

    And do remember – Hedge Fund Managers have been granting themselves up to 40% cuts from the funds they have managed, while contributing to the financial crisis the world’s in with their bets on the market. And now they find themselves outmaneuvered in a manner that would have brought tears to the eyes of Guderian if he’d been able to see it.

    In London, it’s rumored that Porsche has brought down the major players in the local hedge fund industry with this ploy.

  • avatar

    Once upon a time, capitalists lauded the markets and investors because they performed a service of giving us information on company values and directing capital towards its best uses.

    When you see this sort of thing, you have to wonder if the markets are still structured in a way that provides any use to the system. A friend of mine recently spent a weekend with a bunch of really high rollers. These guys all got stupid rich by being financial players of some sort or another (oil, gas, stocks, hedge fund guys, etc.)

    What he came away with is that none of these guys could tell you what stock to buy, EVER. They were all playing such macro trades that their investments would NEVER provide information on which companies were better values as the closest they got to that was to buy sector funds, or some derivative of one of those.

    All I could think of was that Wall Street could now be guilty of ignoring its most fundamental purpose. If the smartest guys aren’t directing our capital, but are instead making all sorts of trades between different markets and vehicles in such a way that they are actually making the market prices LESS informative to the rest of us, then we should really look into whether they should still be allowed to play their games the same way.

  • avatar

    Landcrusher nailed it (and when he and I manage to agree, you know that we must be onto something.)

    This is stock manipulation at its worst. It hurts the credibility of the markets when the pricing mechanism can’t be trusted. Prices are supposed to be derived from demand for the stock, which in turn should be derived from expected earnings and company performance, and not from this.

    You can bet that there were little people who bought this stock at a relatively high price who will have gotten creamed by buying at the wrong time and paying too much.

    Some of these executives need to go to prison for this. If German laws bar their prosecution, then those laws need to be changed so that the next guy who does this spends his retirement years in a cell.

  • avatar

    Somewhere Niccolo Machiavelli is laughing his ass off.

    + Probably illegal; -at least in the US.

    ++ Aren’t the financials of many German companies -or at least automakers- very unclear b/c of weird laws they have???

    [kicks self for not betting with Porsche when first heard the acquisition rumors]

    +++Piech’s fluffery was probably a good feint, as part of the Plausible Deniability of his cover story. The more misdirections you have, often the better the real agenda works.

  • avatar

    Well, it’s all very satisfying that it worked, and the only people hurt were the villians-du-jour in finance. I shudder to think what might have happened if they had failed – Porsche would have blinked out of existence overnight.
    This merely goes to illuminate the fundamental problem of our current economy, in all its forms, which others above have alluded to. Any notion of “real” value has evaporated, and what passes for wealth is now generated by parasitic behavior – the obscure manipulation of the Nth derivative of some recently-invented financial instrument. What something – a house, a car, a company – is actually “worth” is impossible to determine. Should a pickup truck cost 1 years salary of the guy who needs it to do his job? Should the median price of a home be 10 times the median salary in that city? Should a company trade at a P/E of 30 or 40?
    I believe the massive economic realignment we are undergoing – the bursting of the bubble fueled at the individual level by infinite access to credit (“imaginary money”) and at the institutional level with the easy manipulation of imaginary money – will only end when the real values of things have reached an equilibrium. Anything short of that is just another bubble of a different name.

  • avatar

    It’s amazing how much of business history rhymes. You see in the VW mess a repeat of the 1901 Northern Pacific corner… and in the GM Chrysler merger a repeat of Penn Central.

  • avatar

    Reading all your analyses is a fantastic crash course on modern economics for a guy like me who thought I was on a car fan site. So I don’t have much to add except…

    Panamera: What Cayenne buyers buy now that SUVs aren’t cool. Global financial crisis be damned, they will fly off of lots, and keep the market hot for nifty OEM optional floor mats, thereby keeping R&D swimming in money and building superlative Caymans and Carreras.

    (If a dominating stake in GMSchnitzel doesn’t sink them first. The Piechs have lost on this sort of wager before.)

  • avatar
    Martin Schwoerer

    Did it only hurt the villains? How exactly does Porsche/VW know how many regular folks had bought puts on VW, knowing the stock was wildly overvalued?

    What they mean is that most people who got hurt were rich, so it serves them right. But that is callous to the extreme.

    Porsche/VW were only able to do this because they were trading on inside information. It may be legal in Germany because of loopholes — German financial regulators are famously lax. But that sure doesn’t make it ethical.

    I dislike, nay hate the hedgies as much as the next guy. But this ain’t no Robin Hood story. Remember, we are talking about a rich car company here.

    To me, it sounds more like arrogant German engineers getting back at arrogant Anglo-Saxon financial types. Not a pretty picture.

    But it was not just inside information that made those billions for Porsche/VW; it was inside information combined with gigantic leverage. Which is exactly what has brought lots of hedgies down. It wouldn’t surprise me if Porsche/VW now thinks it knows the secret to minting billions on the market. Arrogance comes before a fall, or, to quote Morrissey, November spawned a monster.

  • avatar

    I just want to say, thanks for continuing to report this amazing saga. I do admire the brass balls of these people.

    Bertel, you should expand this post into an article and sell it to a glossy magazine, so that the intelligensia could learn about this too. Moreover, I would buy a book detailing the whole Porsche saga and I bet others would too.

  • avatar

    I’m sorry. I don’t get where this is “illegal.”
    Hedge funds regularly take short positions in the market – hell, they invented and developed the tool.

    The value of anything is anything these days, and many are even manipulating the values to the extent they can get away with it.
    The fact that Porsche positions itself to take advantage of companies that are about to short them is just part of the game that investment and finance has become.

  • avatar

    it sounds more like arrogant German engineers getting back at arrogant Anglo-Saxon financial types. Not a pretty picture.

    It is Germany telling the pigs in the City that their Anglo games will not be allowed in Germany.
    If it takes a little government help, oh well.

  • avatar

    I guess the silver lining is that the Huns didn’t have to charge over the hills to attack the Anglo-Saxons to settle the dispute. There has been SOME progress after all.


  • avatar

    Another Robin Hood aspect to this is how it goes some way towards demonstrating where hedge fund profits are mainly coming from; not superior smarts and knowledge, but simply asymmetric legal and regulatory access to strategies not available to other players. Once the hedgies’ ‘marks’ are playing the same game, with access to information not in a million years available to the average spoilt Greenwich kid to boot, the profit flows suddenly aren’t nearly as unidirectional.

  • avatar

    A spinmeister’s dream. Rob the rich, give to the poor. What’s missing in that picture?

    The giving to the poor part. To me, it looks like Porsche screwed a lot of little guys directly or through pension fund holdings as well as hedge fund managers. Excuse me, but you need a really big brush and will need to lay it on really thick to make the Porsche family look like the poor little guy.

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