Global Insight Perspective | |
Significance | VW's share price rose by more than 26.6% in one day of trading yesterday to a record as investors look to anticipate Porsche's acquisition of a majority stake in Europe's biggest carmaker. |
Implications | The gain in share value means that VW's shares have risen by 47% in total since Tuesday when Porsche announced it had upped its holding to 35.14%, giving the company majority voting rights at VW. It also means that VW is currently Germany's most valuable company by market capitalisation, ahead of utility company E.ON. |
Outlook | This extraordinary increase in VW's share price has little to do with the company's fundamentals and has been caused by traders reacting to Porsche's acquiring a voting majority stake. However, the numbers highlight the stakes involved in Porsche's acquisition of VW and how important the alliance is for corporate Germany. |
Shares in Europe's largest carmaker Volkswagen (VW) rose by 26.6% in one day yesterday to a record high of 304 euro (US$437). This meant that, in total, the company's share price has risen by over 47% since Tuesday when Porsche announced that it had acquired a voting majority in VW, by acquiring a further 4.5% of stock to take its current holding to 35.14%. With around 60% of VW shareholders attending the company's AGM, Porsche's voting majority should be comfortably secured by this new acquisition. However, it is unlikely that Porsche will have to rely on this as the company has stated its intentions to acquire a majority shareholding in VW by November (see Germany: 17 September 2008: Porsche Claims Effective Control of VW After Raising Stake to 35.14%). Yesterday's gain was one of the largest ever one-day gains ever recorded by the Deutsche Börse (DAX) stock exchange. The gains saw VW overtake German energy giant E.ON as the country's most valuable company by market capitalisation, with the closing share price putting VW's combined value at 100 billion euro (US$145 million).
However, the level of trading and record share price would appear to have little to do with VW's economic fundamentals. Rather it appears to be centred around the kind of speculative trading that has been the source of so much of the turmoil experienced in the global financial markets during this week. According to a Reuters report, the share price increase was fuelled by traders looking to cover short positions, having originally bet against the stock, in the run-up to Porsche acquiring a majority stake in VW over the next few months. Porsche did not comment on whether it had been involved in the buying frenzy but the company will have to acquire another 15% of VW's stock to achieve a majority position. Porsche described this week's stake increase to 35.14% as a "milestone" in its long-standing plan to boost its stake in VW above the 50% threshold and seize full control. However, no single buyer acquired more than 3% of the stock during the course of the day, the level at which any institution is required to make a regulatory filing to the DAX.
Outlook and Implications
Porsche may find itself frustrated by this spike in VW's share price as a result of speculative buying. It could potentially make acquiring a further 15% in stake in VW before the end of the year significantly more expensive than originally anticipated. However, the share price had already fallen back by almost 9% to 277 euro at the time of writing. As a result Porsche is likely to wait until the price has returned to a more realistic level before it makes further significant purchases. VW's share price may also have benefited this week from the chaos in the global financial markets due to the ongoing effects of the credit crunch, which has seen several major investment banks either undergo mergers with larger institutions, or in the case of Lehman Brothers go into Chapter 11 administration. As a result, a blue-chip manufacturing company like VW, with a relatively easy-to-understand business model, and a strong line-up of products and brands, may have proved doubly attractive to investors; especially at a time when its largest shareholder is looking to secure another large chunk of shares to take a majority position in it.
However, even if Porsche does successfully manage to secure its majority stake in VW, absolute control of the company is not guaranteed. Porsche's takeover is still opposed by the State of Lower Saxony, VW's second-largest shareholder, which holds an effective veto right over major strategic decisions as a result of the VW Law, while the powerful VW workers council led by Bernd Osterloh is still angry at what it sees as Porsche's hostile takeover, and has yet to agree to terms for representation on the supervisory board of Porsche's holding company, Porsche Automobil Holdings SE.