Latest / The Acquisition Talk with Fexingo: Mergers, Buyouts, and Business Sales for Operators / How the VW Porsche Short Squeeze Rewrote M&A Risk
Transcript
- Lucas: There's a moment in M&A history that still makes veteran deal lawyers wince. October 26, 2008. Volkswagen briefly became the most valuable company on earth — worth more than Exxon, more than PetroChina, more than anyone — not because it built a great car, but because of a short squeeze that rewrote the rules of merger disclosure. Luna: I remember reading about that. The hedge funds got absolutely wrecked. But I never fully understood how Porsche — a much smaller company — managed to pull it off. Lucas: That's the thing. Porsche wasn't trying to squeeze anyone. They were trying to execute a quiet takeover of Volkswagen under the radar. German law at the time required disclosure when you crossed 5 percent of voting shares, then 10, 25, 50, 75. But Porsche found a loophole: cash-settled options. Luna: Cash-settled — so they were derivatives that didn't carry voting rights, and therefore didn't trigger the disclosure thresholds? Lucas: Exactly. Porsche accumulated a massive long position through options that gave them economic exposure to VW shares without technically owning the stock. By mid-2008, they controlled something like 42 percent of VW through actual shares, and they had options covering another 32 percent. In total, they had economic exposure to about 74 percent of Volkswagen. Luna: And the market had no idea. So hedge funds were looking at VW — which was a deeply unloved stock at the time — and saw a perfect short target. Lucas: Right. VW was in the middle of a restructuring, the global economy was falling apart in late 2008, and the stock had been sliding. Short interest hit about 12 percent of the free float. Funds like GLG Partners and Greenlight Capital were betting big that VW would keep dropping. They had no idea Porsche had effectively locked up three-quarters of the shares. Luna: So when Porsche finally disclosed its full position — I think it was on October 26th — the float essentially vanished overnight. Lucas: That's exactly what happened. On Sunday October 26, Porsche announced it had increased its stake to 42.6 percent and held options for another 31.5 percent. The free float — the shares actually available for trading — collapsed to about 6 percent of the company. And most of that was already borrowed by short sellers. When trading opened on Monday October 27, the stock went from around 210 euros to over 1,000 euros in a matter of hours. Luna: One thousand euros. That's insane. And the shorts couldn't cover because there were almost no shares to buy. Lucas: The squeeze was so violent that Volkswagen briefly had a market cap of about 300 billion euros — bigger than any company in the world. The DAX index itself was distorted because VW had such a huge weighting. The German stock exchange had to step in and allow short sellers to borrow shares from Porsche's own holdings, just to let them close their positions. Luna: Wait — Porsche lent shares to the people who were shorting VW? That seems counterintuitive. They were trying to take over the company. Lucas: It was a negotiated settlement. Porsche reportedly made a lot of money on the squeeze — some estimates put their profit at 6 to 12 billion euros — but they also needed the market to stabilize so they could complete the takeover. The lending arrangement let shorts cover at a lower price than 1,000 euros, which reduced systemic risk. Still, hedge funds lost billions. GLG reportedly lost around 350 million dollars. Greenlight Capital had its worst month ever. Luna: And then the whole deal fell apart anyway, didn't it? Porsche ended up getting swallowed by VW. Lucas: That's the ironic twist. In 2009, Porsche's takeover attempt collapsed under the weight of the debt it had taken on to buy VW shares. The company had borrowed something like 10 billion euros. When the financial crisis deepened, creditors got nervous, and Volkswagen ended up turning the tables — acquiring Porsche's automotive business in 2012. So the 'Porsche takeover of VW' became the 'VW takeover of Porsche.' Luna: And this case actually changed disclosure rules, right? The EU eventually closed the cash-settled derivatives loophole. Luna: That's a huge change. It basically killed the stealth accumulation playbook that Porsche used. Lucas: It did. But the legacy goes beyond regulation. Every M&A lawyer I know still brings up the VW squeeze when they talk about merger arbitrage risk. If you're an arbitrageur shorting a target stock to hedge a deal, you need to know who else is building a position. The VW case showed that hidden positions can destroy your risk model in ways you can't anticipate. Luna: And it's still relevant today. You see activists using similar derivative strategies — total return swaps especially — to build stakes without triggering disclosure. The rules are tighter now, but the cat and mouse game continues. Luna: It also makes you wonder how many near-misses there have been since 2008. Situations where a similar squeeze was avoided only because someone caught the position early. Lucas: That's a good question. And it ties into something we talk about a lot on this show — the idea that M&A isn't just about valuation and negotiation. It's about information asymmetry. Who knows what, and when. The VW case is one of the most dramatic examples of that asymmetry in action. Luna: So if you're a deal professional listening, what's the one takeaway? Lucas: Don't assume the disclosed ownership is the whole picture. Derivatives, swaps, options — they can create economic exposure far beyond what appears on the shareholder register. When you're advising a client on a merger, especially a public company deal, you need to map the entire chain of economic ownership, not just the voting stock. Because someone else might be building a position you can't see. Luna: And be ready for the possibility that the float is smaller than it looks. Lucas: Exactly. Which brings us back to the question of whether this kind of thing could happen again. Regulators are more alert now, but the financial system is also more complex. There are more instruments, more cross-border holdings, more opaque structures. I don't think we've seen the last surprise. Luna: Speaking of surprises — this episode is a good example of the kind of deep dive we try to bring you every week. If you've gotten something out of it, we have a small ask. If this show has added to your understanding of how deals really work, maybe buy us a coffee? It's at buy me a coffee dot com slash fexingo. No pressure, but every bit helps keep this ad-free. Lucas: Yeah, we don't run ads, so listener support is what keeps the lights on. And honestly, if today was worth a coffee to you, that's the link — buy me a coffee dot com slash fexingo. Now, back to where we were — because there's another angle to this story that's less discussed, and it involves a single trader who saw it coming. Luna: Oh, I want to hear this. Who was it? Lucas: A hedge fund manager named David Einhorn at Greenlight Capital. He was actually short VW before the squeeze, but he got out early — around 200 euros — because he saw something odd in the options market. He noticed that VW call options were trading at unusually high volumes, suggesting someone was accumulating a large position. He covered his short at a small loss and avoided the disaster. But he later said the experience changed how he thinks about merger situations. Luna: So even the guys who got out early learned a lesson. That's the kind of market wisdom that only comes from a near-miss. Lucas: And today, if you're trading merger spreads, you have to assume someone might be hiding a position. The VW case is a permanent asterisk in every arbitrage model. Luna: Alright, I think we've given everyone plenty to think about. Lucas, good episode. Lucas: Thanks, Luna. And to our listeners — if you want to dig deeper, we'll have links in the show notes to the BaFin investigation report and a great paper on derivative disclosure loopholes. Talk to you next time.