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