Porsche Vw Case

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1. What did Porsche do involving VW shares in October 2008? Why? What happened? In October 2008, Porsche announced that it had increased its stake in Volkswagen to 42.6% and held cash settled options on a further 31.5%, which means it had positions on up to 74.1% of all Volkswagen shares. Porsche pursued this action in order to achieve its long-term goal of taking over the car making giant Volkswagen. A takeover of Volkswagen would mean access to its huge production facilities, its technology and most importantly, its cash. As a consequence of this step, Porsche was able to take advantage of the credit crunch that was hitting the car manufacturers hard during that time which was leading to drops in their share values around the world. After the takeover, traders believed that the share prices of VW would not hold their current levels and would eventually drop, so they started short selling the stock hoping that they will make profit when prices go down at the time when they buy the shares back at the lower price. Porsche, on the other hand, Porsche bought cash settled options representing 31.5% of the shares outstanding in addition to its 42.6% stake in the company shares (up from 35.14% in September 2008) contributing to the stability of the share price. 2. What did Porsche gain from it? Porsche made a huge financial profit from the increase in the stock price when short sellers had to buy back shares to cover their position. Also, Porsche was able to control 71.4% of the Volkswagen shares. 3. Who are the losers? The losers of this whole operation are the short sellers who had to fight over the remaining shares to cover their position pushing the stock prices high and incurring losses on their positions. 4. Why was it possible? Porsche was able to build its secret holding by using financial instruments called cash settled call options. Law in UK

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