The corner of Volkswagen (2008)
This article written by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022) presents the real life case of the Corner of Volkswagen, which is a very infamous example of market manipulation in financial markets.
Introduction
Cornering refers to the attempt of manipulating the market by acquiring a significant portion of stocks of a particular company in order to gain a controlling interest in the market and influence the market in the manipulator’s favor.
Such a manipulation was seen in 2008 when the world’s famous automaker Porsche tried to corner the market of the shares of Volkswagen. This attempt of cornering made Volkswagen the world’s most valuable company in terms of market capitalization for a brief period. It is considered as one of the greatest attempts of cornering ever made in global financial markets.
Volkswagen cornering
In 2008, Porsche made an attempt to acquire Volkswagen by cornering the shares of the company in a unique manner. As per the Volkswagen shareholders’ structure, 20% of the shares of Volkswagen were held by the State of Lower Saxony in Germany while the other 80% were owned by retail and institutional investors.
Wendelin Wiedeking, the then CEO of Porsche, had dreamt of acquiring the Volkswagen group and started accumulating the shares of the company in order to gain controlling interest in Volkswagen. In 2005, Porsche held a 20% stake in the Volkswagen group which later grew to 30% by 2007. As per the rules for mergers and acquisitions, Porsche had to make a mandatory purchase offer to Volkswagen, which was later denied by the shareholders of Volkswagen.
As the 2008 financial crisis hit financial markets, equity markets throughout the world went into a turmoil. Short sellers started increasing their positions in the auto industry since the auto sales faced a sharp decline after the crisis. In particular, short sellers started taking large sell positions in the stocks of Volkswagen in the expectation of a decrease in prices of the company’s shares. But to the short-seller’s misfortune, the share prices of Volkswagen saw an upward curve against the market predictions.
In October 2008, the price of Volkswagen share started representing the weak fundamentals of the industry and saw a downward trend making the short sellers optimistic. But a Porsche’s press statement about its holding position in Volkswagen equity hit the financial markets and panic started building up amongst traders. Over a span of few years, Porsche acquired around 42% of the outstanding shares of Volkswagen by purchasing them from the open market and also purchased option contracts on the Volkswagen shares amounting to 32% of additional shares resulting in potential holdings of more than 74% of the total shares of the company at the expiry of those options.
Short sellers were holding a position of 12% of the total shares outstanding for the Volkswagen company, but there was only 6% of shares available for public trading (74% were held by Porsche and 20% by the Lower State of Saxony). This created a short squeeze in the market.
Short sellers panicked and had to pay huge amounts of money to cover their positions in the market. This resulted in a sharp increase in the Volkswagen share price, which reached a high of $999 within a span of a few days.
The panic then subsided, and the share price returned to its pre-crisis average trading range of $200. But the sudden upward trend made many traders lose millions worth of investments due to the manipulation done by Porsche.
Source: Bloomberg
Owing to Porsche’s greed, the company fell short of cash to settle the option contracts at the time of expiry and was not able to acquire 75% of the outstanding shares of Volkswagen to trigger an acquisition. The debts that Porsche took to manipulate the shares of Volkswagen and falling car sales, led to the bankruptcy proceeding for the company. In late July 2009, Volkswagen bailed out Porsche and later Porsche merged with Volkswagen.
Aftermaths
Although the two famous automakers merged at the end, the failed attempt made by Porsche to acquire Volkswagen is a classic example of cornering practices used by a company to manipulate the share prices of another company. Wendelin Wiedeking, the former CFO of Porsche, had to face market manipulation charges and the company faced legal proceedings with claims amounting to more than $1 billion for the losses that were incurred by small traders and hedge funds for this unjustifiable act.
Technical terminology
Short squeeze is a market situation where a mismatch of demand and supply (high demand and low supply) of an asset results in the prices of the assets to rise significantly. In generally seen instances, when the share prices of a company start rising, the short sellers rush to close their positions in order to avoid heavy losses. The sudden increase in demand is mismatched with the market supply, driving the prices of the assets upwards in a frenzy manner.
Link with the SimTrade Certificate
The concept of Cornering relates to the SimTrade Certificate in the following ways:
- About theory: by taking the Financial Leverage course, you will understand how leverage is taken by investors to increase the size of their market position.
- About practice: by launching the Sending an Order, you will understand how financial markets really work and how to act in the market by sending orders.
Related posts on the SimTrade blog
▶ Akshit GUPTA Market manipulation
▶ Akshit GUPTA Corner
Useful resources
NASDAQ (01/05/2010) When Porsche Cornered Volkswagen: A Legitimate Complaint
New York times (26/09/2005) Porsche Says it Plans to Amass a 20% Stake in Volkswagen
About the author
The article was written in January 2021 by Akshit GUPTA (ESSEC Business School, Grande Ecole Program – Master in Management, 2019-2022).