The curious case of VolksWagen

The global financial crisis is having strange implications across the globe. Courtesy of the crisis, VolksWagen (a car manufacturer) suddenly found itself as the most valuable company on the planet! VolksWagen (VW) is normally less than third the size of market cap leaders like ExxonMobil . However, a string of strange events shaped up to make it the most valuable company for a short time.

Since the subprime crisis erupted, the fortunes of car companies worldwide have been in decline, due to lack of consumer demand, shortage of credit, etc. Most stock traders and hedge funds were 'shorting' auto stocks. Short selling or shorting is the practice of selling a share that the seller does not own at the time of the sale. Short selling is done with the intent of later purchasing the share at a lower price. Short-sellers attempt to profit from an expected decline in the price of the share. In essence, you borrow a share and sell it now, and then buy it later (to return the borrowed share) when the share price has gone down.

Hedge funds and traders had shorted the VW stock to the extent of 13%, which means they had effectively sold off 13% of the total shares (and were expecting to buy them in the future at a cheaper price).

VW was owned 43% by Porsche and 20% by Lower Saxony. One fine day Porsche announced that they had increased their stake in VW by 31% to 74%. Now this meant that only 6% (100 - 74 - 20) of the VW shares were out in the market! Hedge funds and traders were left scrambling - they had to buy 13% shares, but now only 6% were available! As demand outstripped supply, the share price went through the roof. VW’s market cap went up from $100B prior to Porsche’s announcement to $376B (easily surpassing ExxonMobil which was at $343B).

There were other effects of this phenomenal rise. VW is a component of the German share index – DAX. Now at a time when global markets were falling, DAX rose 11.3%, thanks to the ‘VW effect’. People who were shorting the DAX or fund managers who benchmarked their fund performance to the DAX were left hopping mad. There were widespread calls to boot VW out of the DAX index.

Finally Porsche managed to ‘help’ the hedge funds and traders by selling some of its shares (and making a huge profit in the bargain). Just goes to show that the global financial crisis is leading to some strange events, and some companies are making a ton of money from it!


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This post presents a point of view which differs from conventional wisdom. Apart from being a good read (hopefully), it can also be a good starting point to help readers, preparing for CAT (IIM) or other MBA interviews, think differently. Since the data / facts for these posts are derived from a host of sources and websites, readers are advised to cross-check the authenticity before using them anywhere.