Something peculiar happened last week: the Volkswagen (the German car maker) share increased its value 4 times due to some uncommon circumstances.
On October 24th it had a value of 210€, in the days till October 28th jumped till 881€. Chart.
The events which caused it were the share composition and the Porsche buyout.
The share is not very fragmented, the government of the region Niedersachsen (where the headquarter is) has 20% of VW while Porsche had 18% of it and from July 2006 they gradually increased it until they had 35% of it (in September 2008) and the rest was spread among funds and small share-holders.
Porsche then announced that they had collected options (to buy further shares) till 74%, which left a very limited amount of available shares (the Niedersachsen government is not willing to go below the 20% that is guaranteeing power in every decision about the production in the land.
Meanwhile Hedge funds were betting on share losing its value.
How is this working?
Let’s say you have one share of a company and its values is 100€ now but I believe that its value will decrease so I offer you to lend your share for a while – let’s say one month – and I give you 1€ for the trouble. I can do whatever I want with the share for one month until I can give it back it to you at the end of this period.
Once I have it and I immediately sell it for 100€ (the current value) hoping that it will decrease. If after one month its value is 90€ I can re-buy it and I’ll have a net profit of 10€ (actually 9€ after I paid you for the lending)
If the share instead increased I lose money.
Many funds bought Volkswagen shares betting that it will decrease, as all other carmakers shares were doing.
But once Porsche announced they had options and they wanted to buy shares from the small holders all the fonds realized that the value will not decrease and that they need to give the shares back (which in the meanwhile they sold) as soon as possible before the prices would go up. So they started to buy them back frantically . Combined with the fact that not too many were available it worked like a crowded auction (short squeeze effect).
For a moment the action even passed the 1000€ mark, making it the most valuable company in the world.
This was temporary but in the meanwhile a lot of money changed hands, and many funds lost money.
A wonderful example of creative financial engineering of our times.