Porsche - VW Merger Arb is a Hedge Fund Killer

From Germany this morning, we can witness a trade that will be spoken about for years gone wrong.

The have been discussions about Porsche buying Volkswagen for years, and Porsche had accumulated until last week a 42% stake in the VW.  With Porsche's entire market capitalization under $9 billion and the 42% stake in VW valued as high as $100 billion, it seemed like a natural hedge fund merger ab play to short VW's common and buy stock in Porsche (there were actually several other ways to play this, including playing with VW's preferred).   The entire industry thought that this was the biggest give-me.  Many hedge funds pilled in to this in a leveraged way.

It is unclear what news the hedge funds were expected would cause VW to fall. But, yesterday, the rumors started that Porsche had increased their stake to 75% and this morning it was confirmed.  The resulting move in VW's stock was unprecedented - the stock shot up four-fold over 2 days, becoming the largest company in the world on market capitalization.  It doubled today alone, and while resettling, it is still up 50% for the day.  Yikes to anyone who is short, especially the hedge funds that went massively short.

Any high net worth individual or institution who has a hedge fund in European merger arb is on the phone this morning.

Jason Rodgers
Jason Rodgers: Jason Rodgers was an experienced research analyst for a major bank prior to retiring to run his own investment consultancy in beautiful Lihue, Hawaii. Jason contributed articles to BestCashCow from 2008 to 2014.

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