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How Porsche Tricked Hedge Funds out of BILLIONS - YouTube
Channel: Donut Media
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- It's 2008, your parents
are freaking out and fighting
[3]
because they're losing their jobs
[4]
and have to feed you Chef
Boyardee for every meal.
[6]
The world's economy is crashing.
[8]
Meanwhile in Germany, a little
car company called Porsche
[12]
is finalizing what should be one
[14]
of the most deceptively
brilliant economic takeovers
[17]
in history.
[18]
(camera clicking)
[19]
Volkswagen, Germany's automotive giant
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had been suffering amidst
the economic crisis,
[23]
and was on the brink of bankruptcy,
[26]
and Porsche wanted to buy them.
[28]
So how did they plan on taking VW over?
[30]
How did Volkswagen become
the highest valued company
[32]
in the world for a day, and how
did Porsche make $11 billion
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because of this?
[38]
And finally, who prevented Porsche
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from taking Volkswagen over completely?
[42]
We're gonna find out.
[43]
(bass thumping music)
[46]
Thank you to Dr. Squatch for
sponsoring today's video.
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in your body that's
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Dr. Squatch soaps are made
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They smell so good that
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when you enter code DSCDONUT
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the link in the description.
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Now, let's get back to WheelHouse.
[110]
- Are you really in the shower right now?
[112]
- Yes, yes I am.
[114]
Porsche and Volkswagen have
an interesting relationship
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to say the least,
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and the story of how Porsche
managed to turn Volkswagen
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into a hedge fund's worst
nightmare is full of twists
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and turns, so pay attention.
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To understand the scheme
Porsche tried to pull on VW,
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we need to understand what a stock short
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is so this all makes sense.
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You've definitely heard this term before
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because of the whole
GameStop stock incident,
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but almost the exact same
thing happened between Porsche
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and Volkswagen, years earlier.
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We'll start with the basics.
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When a company is publicly
traded, it sells shares,
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or stock, which represents a fraction
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of ownership in the company.
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A company does this in order
to gain additional funding
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to invest in themselves
to create new things
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like new products, or buildings,
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or whatever else they
need to grow the business.
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If the business continues to
make money, the investor wins,
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and the company wins.
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Similarly though, if
the company loses money,
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the investors lose a percentage
of their stock's worth.
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A short sell occurs when a hedge fund,
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which is basically a group of investors,
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chooses to borrow shares of
a company from an account,
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agreeing to pay back the
shares at a later date,
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with interest of course.
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They sell the shares on the market,
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which puts them in an interesting place
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because they've promised
to give back the shares
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not the price they sold those shares for.
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So if the value of their shares drops
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it's cheap for the hedge fund
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to buy the shares off the market
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and return them to the account.
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All the money they saved in
the process is theirs to keep.
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A squeeze happens when the
price of the share goes up,
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instead of down, which is not
what the hedge funds expected.
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The hedge fund needs
to buy back the shares
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at a higher price, in an
attempt to cover their losses.
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The more these hedge funds purchase,
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the higher the share price becomes,
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because of the increased demand.
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This creates a scarcity
of shares on the market.
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With the share prices
skyrocketing, the company,
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in this case, Volkswagen,
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gains tremendous value, almost overnight.
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So how does the stock price
start going up anyway,
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wasn't Volkswagen doing awful in 2008?
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Well, enter Wendelin Wiedeking,
say that 10 times fast,
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the CEO of Porsche at the time,
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and the man who had rescued
Porsche from its near bankruptcy
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and irrelevancy.
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Wendelin Wiedeking had been
reviving the brand for years,
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introducing cars like the
Boxster and the Cayenne,
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which put Porsche in the
best financial position
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it had been in a long time.
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For more on that turnaround,
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check out this episode right here.
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This time though, Wendelin and
his team had their eyes set
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on one thing, Volkswagen.
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It was affordable at the time, mostly
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because VW was on the brink of bankruptcy
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and bleeding money, but
hey, cheap is cheap.
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They were also like best
friends with each other,
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and owning VW would have
been mutually beneficial
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for both companies.
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Earlier in 2005, Porsche
announced they had bought 20%
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of VW, emphasizing it was
not to take them over,
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but rather to help VW stay independent,
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since Porsche relied on them heavily.
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Stock prices stayed stable since
Porsche was buying so many,
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but it was pretty suspicious that Porsche
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was dumping billions of dollars
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into one of the least profitable
car companies in Europe,
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with no clear path to
getting in the black again.
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See, in 2006, Porsche grew
their stake from 20% to 25%,
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still claiming they were not intending
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to take over Volkswagen.
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No sir, not us, we would
never do such a thing.
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By 2007, Porsche had a 31% stake,
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and share prices had doubled since Porsche
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had started buying shares.
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By March 2008, Porsche had authorization
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from their board of directors
to acquire 50% of VW.
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Volkswagen, who was so
financially weak at that point,
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was growing in value because of Porsche,
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and hedge funds were
salivating at this opportunity
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to short sell, they just knew it was bound
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to start going down at some point.
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Wall Street believed VW
was severely overvalued,
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and hedge funds began to take out loans
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in order to short Volkswagen.
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This led to 12.8% of VW shares
being shorted by hedge funds,
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with the hopeful prediction
that Volkswagen would lose value
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because of its poor performance.
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It had to go down, right?
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What could possibly go
wrong for the hedge funds?
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Nothing, except Porsche dropped one
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of the most shocking
economic bombs of the decade.
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On October 28th of 2008,
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Wiedeking revealed Porsche
now owned 42.6% of Volkswagen,
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with 31.5% available in stock options,
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which is the right to
purchase stock at a set price,
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leaving Porsche owning a
whopping 74% of Volkswagen
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and intending to increase that to 75%.
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This would allow Porsche
certain execution rights,
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which we'll talk about in a second.
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The other 20% was locked up
with the German government
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and 5% were locked up in index funds,
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this left almost 1% of shares
available on the market.
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This was a huge issue when 12.8%
of the shares were on loan,
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intending to be shorted later.
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Investors went into a panicked frenzy
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when they discovered that
only 1% of the stocks
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were available.
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They started buying shares
frantically to cover their costs,
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and the severe scarcity
of the shares compared
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to the demand skyrocketed
share prices from $200 to $1000
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in a single day.
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With share prices skyrocketing,
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VW became the highest
valued company in the world
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for a few days, and Porsche
made over $11 billion dollars
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almost overnight.
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(money bag thudding)
(coins clinking)
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Remember what happened with
GameStop earlier this year?
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This is very similar.
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In this case, GameStop was Volkswagen,
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and Porsche was the people
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on Reddit trying to buy GameStop shares.
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The same kind of short happened,
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and GameStop shot up in a day.
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Compare this to a successful
company like Apple,
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which takes years to see the same growth
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that VW did in a single day.
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So why didn't the hedge funds,
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or anyone else for that
matter, see this coming?
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Surely, they wouldn't have
bet on a stock going down
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if they had known Porsche was gonna buy up
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so many shares.
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Unfortunately for our
investors at the hedge funds,
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Porsche sort of lied to them.
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See, by German law,
Porsche was not required
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to disclose the information
about the amount of stake
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in VW they had been acquiring,
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and despite previously claiming
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that they had no
intention to take it over,
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it became pretty obvious
this was Porsche's intention.
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So, how come they weren't
able to take over Volkswagen?
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Well, this is where things
get a little more spicy.
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(bouncy music)
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Back in 2005, when Porsche
bought enough shares in VW
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to become the largest stakeholder,
many people were upset.
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The chairman of Volkswagen
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was a man named Ferdinand Karl Piech,
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the grandson of Ferdinand Porsche.
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Piech, I'm gonna say it Piech, okay?
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It's Ferdinand Piech, I
can't do that Piech sound
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that Germans can when they say it.
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Piech owned 10% of Porsche at the time.
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Now, let me reiterate this,
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the chairman of Volkswagen,
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was the descendant to
the throne of Porsche,
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and owned 10% of Porsche as well.
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Piech was also the former
director of engineering at Porsche
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and was previously in
line to become the CEO.
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Ferdinand Piech had
his hands in both pools
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with the ability to avoid a
takeover attempt by Porsche,
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while also having the
ability to majorly profit off
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of the demand for VW shares
since he was awarded stock
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as compensation for his position.
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He was seriously double-dipping.
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Many people were upset, for good reason,
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because it looked like a deceptive,
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nepotistic power move
by the Porsche family.
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Piech had his hand in both companies,
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giving him a little too much influence.
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Christian Wulff, and remember
that name, it's important,
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the president of Lower
Saxony, a state in Germany,
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which at the time, owned 20% of VW shares,
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wanted to replace Ferdinand Karl Piech
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due to this obvious conflict of interest.
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But Piech had a trick up his sleeve.
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A trump card that would come into play
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at the perfect moment.
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Unfortunately, there were
still two roadblocks in the way
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for the Porsche and the Piech family,
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which prevented them from taking over VW,
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The first reason being
the somewhat-antiquated
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Volkswagen Rule.
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When government-owned Volkswagen
went private in the '60s,
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parliament made some laws
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to keep Volkswagen under their influence.
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Any government party that
owned 20% of VW had veto power
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and influence within the company.
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In this case, it was Christian
Wulff of Lower Saxony,
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that state in Germany.
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The government had no intention
to sell VW to Porsche.
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Christian Wulff advocated to stop Porsche
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from taking over as well,
requiring that Porsche needed
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to own 80% of shares, and not 75.
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Porsche now needed even
more shares if they wanted
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to claim VW as their own.
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The second issue was that
Porsche had taken huge loans
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when acquiring VW shares,
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and with the increasing
price of these shares,
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Porsche had accumulated around $13 billion
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in debt during the economic crash,
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and the banks wanted it back.
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Wendelin Wiedeking claimed he
was surprised by the harshness
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of the banks, but he had
a plan to squirrel out
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of the bind he now found himself in.
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If Porsche could acquire that 80% stake,
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they would be able to
tap into VW's pockets,
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and find $14 billion in cash.
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He could then pay off Porsche's debt.
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The problem was, nobody in Europe wanted
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to give Porsche any more loans.
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So where could they go to find some?
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None other than the small,
[649]
Middle Eastern peninsula country of Qatar.
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Porsche actually managed
to arrange a deal in Qatar
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with several wealthy investors in order
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to get themselves the money
they needed to take over VW.
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This would have solved all their problems,
[661]
and Porsche would now own VW.
[663]
But right before everything
was signed and agreed on,
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Germany stepped in.
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Christian Wulff, along with Angela Merkel,
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the chancellor of
Germany, blocked the deal.
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They were only able to do this
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because of the Volkswagen rule,
which we just talked about.
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But it gets more complicated, Piech,
[679]
the tricky guy who has his
hand in Porsche and VW,
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chose to side with
Christian Wulff this time.
[685]
That's right, he sided with
the man who wanted him removed
[688]
from his position, and
they asked the investors
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from Qatar to divert the funds
to VW instead of Porsche.
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What was Piech thinking?
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And where did this leave Porsche?
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Well, not in a good spot.
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Porsche was heavily in debt, out of cash,
[701]
and suffered from Christian
Wulff's veto powers.
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Fortunately, our friend Ferdinand Piech
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had an ace up his sleeve.
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Piech played Christian Wulff's side,
[709]
proposing a merger between
Volkswagen and Porsche,
[712]
on the condition that
VW would buy Porsche,
[715]
and become one company
under the Volkswagen name.
[718]
The Porsche and Piech family
would then own over half of VW,
[721]
since they owned so many
shares to begin with.
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Christian Wulff and Lower Saxony
would keep their 20% stake,
[726]
and the investors from Qatar
would pay off the debts
[729]
for a 17% share in the
new Porsche/VW merger.
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VW didn't have much of
a choice, and honestly,
[735]
neither did Porsche.
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The best option was to
merge the companies,
[739]
and that's what happened.
[740]
Today, Porsche still remains
under the Volkswagen name,
[743]
along with other big
brands like Lamborghini,
[745]
Bentley and Audi.
[746]
The merger had been
very mutually beneficial
[748]
for both companies,
[749]
and Porsche has been pumping
out some sick cars ever since.
[752]
I don't think it was a bad thing.
[753]
Many people used to call
Porsche, the hedge fund
[756]
that sold cars on the
side and now you know why.
[760]
That's the story, that's the end.
[761]
Thank you very much for
watching this video.
[763]
If you haven't subscribed to Donut yet,
[764]
we just hit five million
subscribers not too long ago,
[767]
and it's not too late to
hop on board the train.
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Check out these videos about Porsche.
[771]
We've done a lot of them, I
love talking about Porsche,
[773]
great car company.
[774]
Be kind, see you next time.
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