Hedge fund managers the losers as Porsche completes audacious takeover of Volkswagen

For most Germans, the saga of the Porsche takeover of Volkswagen has concluded with a satisfying Schadenfreude-filled final act, as hedge fund managers got badly burned

IF DISNEY ever decides to make a family feature out of the Porsche takeover of Volkswagen, screenwriters might consider the title Herbie Hammers the Hedge Funds.

Some 75 years ago, Ferdinand Porsche sketched the now iconic curves of the Volkswagen Käfer or "people's car beetle" for Adolf Hitler.

Although it took a dictator to democratise motoring, Volkswagen shook off its fascist founder to become Europe's largest car manufacturer, dwarfing Porsche's own company in the post-war years.

By the start of the 1990s, it looked as if Porsche might not survive to see the new century, but new management and a drastic slash-and-burn at the Stuttgart headquarters saw the company return to rude health.

Three years ago, enjoying record sales of 100,000 cars a year, the cash-rich Porsche launched an extraordinary bid for Volkswagen - David to Europe's automotive Goliath, producing five million cars annually.

The deal was initially pitched as a family affair: the luxury car maker is still controlled by two wings of the founder's family, the Porsches and the Piechs. Volkswagen, meanwhile, was being steered by another Porsche grandson, Ferdinand Piech.

As VW chief executive, he convinced the company's unions that the saviour from Stuttgart would protect the company from investment funds and the two companies began RD co- operation. VW even began building engines for Porsche- brand vehicles such as the Cayenne.

As Porsche continued to buy VW stock, relations became strained this year when it became clear that the Stuttgarters were not interested in keeping up the appearance of a merger, but favoured a takeover on their own terms.

Porsche knew that timing was everything. At the VW annual meeting in April, it got its representatives on the board and forced through limited changes in the company structure to allow them to exert greater influence.

However the greatest hurdle to full control remained: the so- called Volkswagen law from 1960 which protected the company from foreign takeover and allowed the state of Lower Saxony, where the company is based, to veto any major changes to company practices.

Berlin has fought for years to retain this law, rejecting claims from Brussels that it distorts competition, but the European Court struck down the statute last year. Berlin made minor revisions, but these are considered insufficiently radical by Brussels.

Next Wednesday, internal market commissioner Charlie McCreevy is expected to send a final letter to Berlin telling it to drop the law entirely or face legal action and the prospect of huge fines. With the Porsche takeover in the bag and VW safe from foreign investors, Berlin is now likely to drop its position.

It is no coincidence, then, that, after months of insisting that it was happy with its 42 per cent holding, Porsche launched the final round of its campaign just days before the final word from the commission.

Last Sunday, it released a statement saying that it had quietly built up its stake in Volkswagen - through stock and options - to 74 per cent, just shy of the 75 per cent controlling stake.

In a climate of economic gloom, when car stocks are slumping due to softening demand, the news electrified Frankfurt's staid stock exchange.

Volkswagen shares trebled in value in Monday trading and, when they crossed the €1,000 mark - making VW the most valuable company in the world, if only for a few minutes - traders stood up and applauded.

"I have huge respect for what Porsche has achieved, it's an incredible performance," said Jürgen Pieper of the private bank Metzler.

Not everyone was cheering. In anonymous offices around the world, hedge fund managers went white as €30 billion worth of short bets on VW stocks went spectacularly wrong. They were caught out by Porsche's silent shopping spree and completely unaware that, by Sunday, all but 6 per cent of free-traded stock was now in the hands of the Stuttgarters.

The problem was, hedge fund managers had promised their clients twice that amount.

So when trading began on Monday, it was they who were behind the surge in the share price as an undignified scramble began to buy back, for more than €1,000 apiece, millions of shares they had borrowed and sold for a third of the price. Rather than making a fortune with their bet that VW shares would fall, allowing them to buy back later at a discount, they lost a fortune.

"I've had hedge fund managers on the phone all morning, literally sobbing down the phone," said one Frankfurt analyst on German television. The value of the "people's car" company reached obscene levels this week before coming back down to earth when Porsche released stock options to ease the hedge fund squeeze.

The episode has provided much amusement in Germany. While other countries celebrated hedge fund managers during the boom as masters of the universe, German popular opinion never moved beyond contempt.

Social Democrat leader Franz Müntefering made headlines worldwide three years ago with a remark that captured the public mood, comparing these investors to "locusts" who descend on healthy companies, eat away the substance and fly off again.

Hedge fund managers are crying foul and the Frankfurt stock exchange is taking considerable flak but, for most Germans, the Porsche takeover of Volkswagen has concluded with a satisfying, Schadenfreude-filled final act.