City Republic: Hedge fund car crash

LONDON - Volkswagen briefly became the biggest company in the world on Tuesday, overtaking Exxon by market value, even though its sales are around a third of the US oil giant's and its profits a fifth.

You would think this would be jolly nice for the people buying the shares but it was anything but.

Our old friends the hedge funds had been borrowing stock to sell short in VW, correctly calculating that the global car market was falling off a cliff.

As Europe's largest producer VW stood to suffer more than most.

What the hedgies didn't know was that on Monday, news would emerge that 42% shareholder Porsche would announce that it had upped its stake to a near-controlling 74%.

20% of VW is held by the government of Lower Saxony, where VW has its Wolfsburg headquarters, and it had no intention of helping out the hedge funds by selling any of it as local laws mean that you can't control a company there with less than 80%.

The lower Saxons don't care for Porsche, which they think will cut jobs at VW so they're holding on.

So the unfortunate hedge funds, who need to return the stock they've borrowed at some point, had to pile in the market in pursuit of the 5% or so of available stock to cover their positions.

And the price, as you'd expect, soared, reaching 1050 euros per share at one point (valuing VW at $360bn) compared to Friday's price of 200 euros.

It later fell back to 686 euros as the hedge funds got their stock (some of them anyway) but left them nursing an estimated £20bn headache.

Shame really.

As for Porsche and VW the intention is to create a German-owned industrial powerhouse that can compete with the likes of Japan's Toyota and Honda (nobody's very concerned about the US car giants these days) on equal terms.

To do that Porsche needs to get its hands on VW's cash flow and that could be a problem with Lower Saxony in the frame.

But the move is certain to drive further consolidation in the industry, possibly in Germany itself.

The US's three car manufacturers look certain to reduce to two with General Motors merging with Ford, France has one in Peugeot-Citroen and Italy one volume producer in Fiat (we don't have any of course).

Did you know, by the way, that Hitler's pet car company, which became the post-war VW, was offered to the British during the occupation and they turned it down? Another howler.

Anyway some analysts are even speculating that Daimler Benz (Mercedes), which has lost a fortune through its ill-advised involvement with Chrysler, might seek a merger with BMW, which seems to sail on through any and every storm.

Less dramatically BMW is thought to be interested in buying the heavily loss-making Volvo, owned by Ford, although it's hard to see what Volvo would bring to the party in terms of its model range.

I wonder if the hedge funds have short positions in Daimler Benz?

Agencies face up to a difficult 2009

Aegis, Interpublic (IPG) and Publicis all reported solid numbers this week with IPG actually turning a third quarter profit of $45m compared to a $21m loss last year.

All of them are predicting a difficult 2009, with Publicis' Maurice Levy the most optimistic, and analysts are forecasting an overall decline in organic revenues (that is, without acquisitions) of 5% next year.

So their poor old workforces will be anticipating further job losses.

One rather nervous workforce will be the people at research company TNS, acquired for £1.1bn by WPP recently.

WPP's Sir Martin Sorrell has been saying for a year now that 2009 will be a flattish year for the industry as there's no Olympics, presidential election or big international football tournament to boost spend.

But not even he would have anticipated the turbulence in the financial markets and the onrushing recession.

WPP reports its third quarter earnings on Thursday and this week it's already come under the cosh from brokers Cazenove.

Caz, said to be the Queen's broker although it's far too gentlemanly to confirm this, says that WPP will be butting against its debt covenants in 2009 as it pays for TNS with loans that are markedly more expensive now than they were when the deal was first mooted.

If it's right, and there is indeed a reduction in the ad market  next year, WPP will have to find some other way of protecting its margins, more job losses presumably, among other things.

The company is far more diversified now than it was when it almost became unstuck in 1989 after it bought Ogilvy & Mather for the then massive sum of $825m.

But Caz's observations won't have been greeted warmly by Sir Martin.

Markets steady following turbulent Tuesday

The Wall Street Dow Jones index soared nearly 11% yesterday, despite dire US consumer confidence figures, following a heavy sell-off on Monday.

Nobody really knows why although there are expectations that the Federal Reserve will cut interest rates from 1.5 to 1% today (Wednesday).

An interesting development though is that humans are said to be returning in numbers to the trading floor of the New York Stock Exchange as they're better able to cope with the ups and downs than computers.

The trouble is that computers have sell orders programmed into them when prices fall. So they can very easily turn a steep fall into a rout.

Let's hope the humans can do a little better.

In the meantime Far Eastern markets rallied on the back of Wall Street this morning and also in the expectation of the first cut in Japanese interest rates since 2001.

In Europe the FTSE 100 opened solidly higher (doubtless hoping that Mervyn King will take his cue from the US and Japan), as did France.

Germany was slightly off as the VW excitement abated.

If the markets can make it to the end of the week without any more tumult then we may move into calmer waters.

Stephen Foster is a former news editor of Campaign, former editor of Marketing Week and Evening Standard ad columnist. He is a partner in Editorial Partnership and writes the blog and Politics of the Media for Brand Republic.


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