Table of Contents
Case - Study
VOLKSWAGEN - SHORT SQUEEZE
99
Case Study VW
Common Stock vs. Preferred Stock
Common Stock
•
Common shares/stocks represent ownership in a company and a
claim (dividends) on a portion of profits
•
Investors usually get one vote per share to elect the board
members, who oversee the major decisions made by
management
•
Over the long term, common stock, by means of capital growth,
yields higher returns than preferred stock or other investments
in the company
•
This higher return comes at a cost since common stocks entail
the most risk
•
If a company goes bankrupt and liquidates, the common
shareholders will not receive money until the creditors,
bondholders and preferred shareholders are paid
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Case Study VW
Common Stock vs. Preferred Stock
Preferred Stock
•
Preferred stock represents some degree of ownership in a
company but usually doesn't come with the same voting rights
•
With preferred shares, investors are usually guaranteed a fixed
dividend as long as the company exists
•
This is different than common stock, which has variable
dividends that are never guaranteed
•
An advantage is that in the event of liquidation, preferred
shareholders are paid off before the common shareholder (but
still after debt holders)
•
Preferred stock may also be callable, meaning that the company
has the option to purchase the shares from shareholders at
anytime for any reason (usually for a premium)
101
Case Study VW
Common Stock vs. Preferred Stock
How are Common and Share Stock usually connected?
102
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Case Study VW
Common Stock vs. Preferred Stock
What happened here?
103
Case Study VW
Common Stock vs. Preferred Stock
To understand the current market situation no expertise is needed...
104
3
Case Study VW
Common Stock vs. Preferred Stock
To understand the current market situation no expertise is needed...
105
Case Study VW
Common Stock vs. Preferred Stock
What happened here?
106
4
Case Study VW
Volkswagen Common Stock
What happened here?
107
Case Study VW
Volkswagen Common Stock
A possible scenario
•
Hedge-funds, investment funds and other financial participants
consider the Volkswagen common share overvalued
•
According to their market and stock appraisal they open short
positions on VW common shares
•
What is a short position again?
•
Market participants borrow (in this case) VW stock from
other market participants (banks, funds, etc.)
•
They sell the acquired amount of stock at a market price
of (let’s say) 400€ and speculate that the price of the VW
stock will fall to 150€
•
If this was the case, they repurchase the VW stock at
150€, give the physical stock back to the original owner
and keep a profit of 250€ per share (minus some
commission fee)
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Case Study VW
Volkswagen Common Stock
A possible scenario
•
•
The risks of short selling:
•
The asset value moves in the other direction as the
speculator expected
•
There are physically no more assets, which can be bought
back
The role of Porsche:
•
Porsche announced on Sunday that their share of VW
common stock reached 42,6%
•
Porsche also announced their holding of 31,5% cashsettled options on VW common stock, which in case of
exercise brings them to 74,1%
•
Niedersachsen owns another 20% which leaves about less
than 6% free-floating shares in the market
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Case Study VW
Volkswagen Common Stock
A possible scenario
•
On Sunday the market received the information that there are
only less than 6% of free-float shares available
•
To the same time, the market realized that there are 15% of
short positions on the VW common shares
•
Additionally, considering the VW common shares options:
•
A lot of those contracts are traded OTC
•
Some of the investors who are having long-put position in
VW options might have been forced to execute their
positions due to the counterpart investors who have a
long-call option on VW common shares
The result...
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Case Study VW
Volkswagen Common Stock
... A SHORT SQUEEZE!
111
Case Study VW
Volkswagen Common Stock
Consequences of a short sqeeze
•
If the market participants (short-sellers) can not repurchase and
deliver the physical stocks according to the contractual
agreements they will suffer from
•
Legal consequences
•
Loss of reputation
•
These circumstances might end up in the illiquidity of these
market participants
•
Exit strategy: PANIC PURCHASE OF VW common stocks!
•
VW was for some periods during Tuesday the most expensive
company on the planet (peak: 296 billon €)
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Case Study VW
Volkswagen Common Stock
Consequences for other market participants
•
The DAX as a international benchmark of the German stock
market is no longer valid (market-portfolio?)
•
The German Investment Law restricts investments of funds to be
larger than 10% in a single asset
•
The weight of VW common stock in the DAX became 26% on
Tuesday, restricting fund managers to invest in the DAX
•
Deutsche Börse reacts today and reduces the VW weight in the
DAX to 10%
•
Porsche plans to reduce its cash-settled option position for 5 %
113
Case Study VW
Volkswagen and the WestLB 2007
Going back to the risk of options, preferred and common stocks
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Case Study VW
Volkswagen and the WestLB 2007
Going back to the risk of options, preferred and common stocks
•
WestLB speculated on a reduction of price difference between
VW common and preferred share in the spring of 2007
•
Long-put option on VW common shares
•
Long-call option on VW preferred shares
•
Again it is Porsche who announced to raise its part of VW on
30,9% which again triggers the common share to raise
•
The West LB speculation goes bad and within a few days the
losses are more than 100.000.000 €
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