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View Full Version : Hedge Funds burned by Porsche in VW take-over bid



David Guyatt
01-23-2009, 04:05 PM
Watch the BBC Money Programme documentary account

Fast Bucks: How Porsche Made Billions:

http://www.bbc.co.uk/programmes/b00h3mxz

Read The Economist story on the affair:

http://www.economist.com/finance/displaystory.cfm?story_id=12523898

Porsche and VW
Squeezy money
Oct 30th 2008
From The Economist print edition

How Porsche fleeced hedge funds and roiled the world’s financial markets

GREAT cornering and eye-popping acceleration make Porsche’s cars popular among thrill-seeking bankers and hedge-fund managers. Now its clients are discovering that the carmaker itself has an unexpected talent for cornering markets. In a few tumultuous days it is thought to have made a cool €6 billion-12 billion ($7.5 billion-15 billion) on the share price of Volkswagen (VW)—a coup that has roiled the world’s financial markets.

Porsche’s gambit was as old as finance itself. For about three years it had been steadily increasing its stake in VW, a much larger yet less profitable carmaker with which it shares a little production. Its buying had driven up the price of VW’s shares to above the level at which it would make any economic sense for Porsche to buy VW. Seeing this, hedge funds sold shares in VW that they did not own. One strategy was a bet that VW’s share price would fall. Some also bought shares in Porsche, in a wager that shares of both would converge.


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. Adam Jonas of Morgan Stanley warned clients on October 8th of the danger of playing “billionaire’s poker” by betting against Porsche. Max Warburton of Alliance Bernstein said Porsche could make billions by squeezing short-sellers of VW’s shares.

At the time Porsche dismissed these musings as a “fairy-tale”. But on October 26th it executed a handbrake turn, saying that it owned nearly 43% of VW’s shares outright and had derivative contracts on nearly 32% more. That meant it had tied up almost all of the freely available shares (the rest are held by the state government and index funds). Hedge funds quickly did the maths, concluding that they could be caught in an “infinite squeeze” in which they were forced to buy shares at any price.


Their frenzied buying sent VW’s share price soaring (see chart). After languishing below €200 last year, it jumped to more than €1,005 at one point on October 28th, briefly making VW the world’s most valuable company. Porsche may have made paper gains of €30 billion-40 billion in what one analyst described as “one of the most brilliantly conceived wealth transfers ever.” Porsche says it never intended to make money on derivatives and only bought them to protect its planned purchases of VW stock. On October 29th it said that it would settle up to 5% of its VW options, freeing up a similar portion of stock and sending the price down again.

Hedge funds that take bad bets may garner little sympathy, but the VW saga does more than punish a few “locusts”. On October 28th shares in Morgan Stanley, Goldman Sachs and Société Générale wobbled on worries (denied by all) that they might also be exposed to VW. If the losses are big enough to cause the failure of even a few hedge funds, that would spell more pain for the battered banking system. Other casualties include buyers of passive funds that track the German market who will end up with a disproportionate stake in VW within their portfolios. With VW’s share price falling again, those who sell now will lock in a loss.

The greatest damage is to the reputation of Germany’s capital markets, where regulators are now belatedly investigating what went on. Allowing acquirers to build large secret stakes in bid targets does nothing for confidence. Even Porsche may come to rue its coup. “They may struggle to sell 911s to hedge-fund managers for years and years to come,” says one investor.

***

German Billionaire Kills Self Over Financial Meltdown:

Newsmax.com


German Billionaire Kills Self Over Financial Meltdown

Tuesday, January 6, 2009 11:11 AM


FRANKFURT -- German billionaire Adolf Merckle, assailed by financial turmoil and struggling to salvage his business empire, has killed himself, his family said on Tuesday.

"The desperate situation of his companies caused by the financial crisis, the uncertainties of the last few weeks and his powerlessness to act, have broken the passionate family entrepreneur and he took his own life," a family statement said.

Prosecutors in the southern German town of Ulm, near Merckle's home, said the 74-year-old died when a train struck him late on Monday. There was no sign anyone else was involved, they said.

Merckle was ranked as the world's 94th richest person in 2008 according to Forbes magazine and his family controls a number of German companies including cement maker HeidelbergCement and generic drug company Ratiopharm, but its empire was rocked last year by wrong-way bets made on shares in carmaker Volkswagen.

Banking sources had told Reuters the family lost hundreds of millions of euros on investments, with losses of about 400 million euros ($539.4 million) on Volkswagen shares alone.

It has been in talks for weeks with banks to renegotiate loans.

Shares in HeidelbergCement were off 5 percent at 31.70 euros at 1547 GMT, having dropped to 29.16 euros earlier in the session.

© 2009 Reuters. All rights reserved. Republication or redistribution of Reuters content, including by caching, framing or similar means, is expressly prohibited without the prior written consent of Reuters.

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Wiki entry on Adolf Merckle:

Adolf Merckle
From Wikipedia, the free encyclopedia


Born March 18, 1934
Died January 5, 2009 (aged 74)
Nationality Germany
Occupation Businessman
Net worth ? US$9.2 billion
Religious beliefs Lutheran

Adolf Merckle (March 18, 1934 – January 5, 2009) was a businessman, and one of the richest people in Germany.[1]

Merckle was born in Dresden, Germany into a wealthy family. Most of his wealth came from inheritance. He developed his Bohemian grandfather's chemical wholesale company into Germany's largest pharmaceutical wholesaler, Phoenix Pharmahandel. His family also owns the generic drug manufacturer Ratiopharm, and large parts of cement company HeidelbergCement as well as vehicle manufacturer Kässbohrer.
He was educated as a lawyer but spent most of his time investing. He lived in Germany with his wife and four children.

Merckle made a speculative investment based on his belief that Volkswagen shares would fall, when, in October 2008, a support of Volkswagen by Porsche SE sent shares on the Xetra dax from €210.85 to over €900 in less than two days, resulting in losses estimated in the hundreds of millions of dollars for Merckle.

In 2007 he was worth US$12.8 billion by most estimates (Forbes), and by December 2008 he was still worth $9.2 billion, a loss of $3.6 billion. In 2006 he was the worlds 44th richest man, moving to 96th place by December 2008, yet still one of Germany's top five richest men.

Adolf Merckle committed suicide on January 5, 2009 by throwing himself in front of a train near his hometown of Blaubeuren.[2][3]It was believed that his cement company was unable to make payments on a huge loan taken out to purchase an English competitor.[4]

Adolf Merckle on Forbes.com

Tromm, Helmuth and Sheenagh Matthews. 6 January 2009. Billionaire Merckle Killed by Train. Bloomberg News.

German billionaire Adolf Merckle commits suicide. The Associated Press.

"Facing Losses, Billionaire Takes His Own Life" (2009-1-6). Retrieved on 2009-1-6.

**

Something smells wrong.

Before his losses, Merckle had US$12,8 billion. After his losses, he had US$9.2 billion (an overall loss of $3.6 billion), whereas the losses he incurred in the VW affair was estimated to be in the "hundreds of millions of dollars" range (said by The Economist in the foregoing story to be 400 million euros or $539 million). Half a billion in other words.

My first question is this: If you've lost 1/25th of your fortune does this motivate you to kill yourself, especially when you still have over $9 billion in the bank?

The answer has to be a resounding no surely? And if that is the case then someone appears to have suicided Herr Merckle.

This leads to my second question: Having lost a known $536 million, what accounts for the other unknown loss of $3.1 billion (actually just under that figure).

Journalism being what it is these days, these questions are unlikely to be answered.

Perhaps someone should dig more deeply into Herr Merckle's story. For example using actual records to probe far more deeply into his father's wartime career to see just how his fortune was really made is one line of enquiry that may produce fruit?