Porsche makes huge profit; the company accused of violating the law

[EnI]

VW options power Porsche profits

FT.com
By Daniel Schäfer in Frankfurt
Published: November 7 2008 12:34 | Last updated: November 7 2008 17:10

Porsche on Friday revealed a €7.8bn gain from its contentious stake building at Volkswagen, letting its pre-tax profit soar at a time when the sports carmaker’s’competitors worldwide are struggling with a sharp downturn in the industry.
The German premium carmaker said its profit before tax jumped by 46 per cent to €8.57bn in the fiscal year 2007-08, which ended in July. That was far more than most analysts had expected, with most of them even betting on a slight decline.
Once again, Porsche has earned a lot more from its options strategy than from selling cars. It made €6.83bn from trading in VW options – eight times what it made from selling cars – alone, plus another €1bn from the rising value of its Volkswagen stake.
Some analysts have dubbed the company a hedge fund in the past because it earns so much money from financial transactions.
Porsche also said on Friday that it planned another large special dividend of €2 for each preferred share, up a third from last years special dividend. The Financial Times had revealed earlier this week that Porsche was set to pay a higher extraordinary dividend than last year on the back of the VW gains.
The sports carmaker left the regular dividend unchanged at 0.70 cents. Its net profit reached €6.39bn in the last fiscal year, not much lower than its €7.5bn revenues.
The carmaker also warned that it did not expect car sales in its fiscal year 2009 to reach the level of 2008 due to a rapid market downturn.
Last month, VW shares rocketed unexpectedly disclosed that through the use of derivatives it had increased its stake in VW from 35 to 74.1 per cent, prompting Germany’s financial regulator to launch a formal investigation into possible market manipulation.
Porsche started to buy Volkswagen’s shares three years ago with the help of controversial ”creeping takeover” tactics, using options to avoid disclosure of its full stake in VW.
Porsche’s huge profit were published just days before hedge funds industry trackers will reveal how much some of these funds have lost on the back of the ballooning VW share price in October.
Porsche shares were up 4.9 per cent in afternoon Frankfurt trading.







DWS Fund says Porsche broke laws over VW stock -paper

Reuters.com
Sun Nov 9, 2008 9:56am EST

FRANKFURT, Nov 9 (Reuters) - Germany's largest retail fund company, DWS, accused Porsche SE (PSHG_p.DE: Quote, Profile, Research, Stock Buzz) of intentionally breaking domestic securities laws by cornering the market in Volkswagen AG (VOWG.DE: Quote, Profile, Research, Stock Buzz) ordinary stock, its managing director said.
Porsche had triggered a stampede to close short positions in Volkswagen shares, sending them to over 1,000 euros, when it surprised the market by saying on Oct. 26 it had effectively gained access to 74.1 percent of VW votes, reducing the free float to less than 6 percent.
"The company violated rules against market manipulation, pitted itself against all other DAX companies and caused damage to scores of investors," Klaus Kaldemorgen told the Frankfurter Allgemeine Zeitung in comments published on Saturday.
Asked by the paper what he meant, the head of Deutsche Bank's DBKG_p.DE retail fund subsidiary cited paragraph 20a of the German securities trading law (WpHG) as prohibiting dealings that result in false or misleading signs pertaining either to supply or demand or that create an artificial price level.
"Exactly that is what Porsche has done, in my opinion," Kaldemorgen said.
A spokesman for Porsche dismissed the accusation as "lacking any foundation", but when pressed by Reuters to respond to the detailed views of DWS he declined to comment further.

WITHOUT RISK
At the time Porsche revealed it had control of 74 percent, reducing the free float dramatically since Lower Saxony holds just over 20 percent, it said the announcement would give short sellers the opportunity to unwind their positions without haste or considerable risk.
Within 48 hours, the stock had nearly quintupled in value and the spread between the ordinary shares and non-voting preferred stock which used to trade within a narrow band had leaped to more than 950 euros.
Kaldemorgen's comments represent the harshest yet amid a storm of criticism from investors over the short squeeze that temporarily made VW the world's most valuable company.
The matter has already prompted a formal investigation by German securities watchdog Bafin.
Kaldemorgen said that while Porsche may have enriched itself by between 10 billion euros ($12.8 billion) and 40 billion depending on the number of call options on VW ordinaries Porsche may have sold or exercised, the rest of the market suffered losses as a result.
Index funds were forced to "synthetically" buy exposure to VW through the purchase of futures for the entire DAX .GDAXI and the subsequent sale of holdings in the other 29 German blue chips that comprise the index.
"The bottom line is everyone lost: the other DAX companies, the private wealth managers and their clients, retail investors, even the (Deutsche) Boerse (DB1Gn.DE: Quote, Profile, Research, Stock Buzz), whose reputation suffered just like that of capital markets overall. And all because one company did not play fairly," he said.








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Hmmm ... Making only €770 million profit (9% of total profit) from core automotive business, and €7.8 billion profit (91% of total profit) from financial operations makes Porsche AG an investment fund ,or even a hedge fund company, and not an automotive at all!!!

Not to mention the hideous fact that the revenues from car sales (core automotive business) were €7.5 billion in total , which is less then total profit! Revenues from core business lower then pre-tax profit?????

This world's going totally crazy ...

 

[Deleted member 25]

 

[EnI]

^

It's more like this:

 

[bmer]

Gotta love the trick Porsche made on the shorters.

 

[LaArtist]

Porsche is Evil..and i like it

 

[Centurion]

Porsche are as good with engineering as they are with finance and economics. Although the portion of profit made from car sales in relation to investment profits is ridiculous, I see nothing here but jealousy from DWS. What about companies like Apple who made a fortune between 2005-2008 from increase in share value or Google?

Like I always say: Fast money don't last to long, you've got to pace it.

As much as those desirable VW shares are worth it's all just speculative value offering zero cash slow to Porsche unless they sell the share and really benefit from the appreciated value. And we all known that Porsche aren't about to do just that but the opposite. Right now they are just like Google share owners in the end of 2007, sitting on an hot air balloon. All the value gained during the recent weeks can evaporate over night. The Google share is a prime example that has dropped from 700 dollars to a mere 300 dollars in value over less than 11 months.

 

[EnI]

What about next year? ... When Porsche will announce about 80% or more drop in profit - since there will be no easy money profits (from financial operations) any more, just profits from e core automotive operations.

I'm curious what for this year's profit will be used ... will it be distributed to shareholders & employees, or stay undistributed, or used for R&D, or used for paying off debts to banks (money for VAG takeover), or for further acquisitions? That's what I'm most curious about right now.

 

[Centurion]

Remember that this is just profit. Their balance sheet will be the one with red figures since the appreciating value of their stocks hasn't technically brought any new money into the company like sales from cars do. Porsche have negative cash flow like any other manufacturer except that their papers are balances thanks to the shares. There is hardly any money do distribute since Porsche aren't selling any of their VW shares in which all the profit is tied up into.

 

[Porsche Guy]

Asked by the paper what he meant, the head of Deutsche Bank's DBKG_p.DE retail fund subsidiary cited paragraph 20a of the German securities trading law (WpHG) as prohibiting dealings that result in false or misleading signs pertaining either to supply or demand or that create an artificial price level.

If Porsche's statement that they had raised their stake in VW to 74.1 percent is true, then they did nothing wrong. My only question is, how did they acquire that much stock with raising stock prices in the first place?

 

[EnI]

If Porsche's statement that they had raised their stake in VW to 74.1 percent is true, then they did nothing wrong. My only question is, how did they acquire that much stock with raising stock prices in the first place?

Porsche's Volkswagen Stake Sparks Call for Disclosure (Update3)

By Karin Matussek





Oct. 31 (Bloomberg) -- Porsche SE's use of options to build a stake in Volkswagen AG took advantage of flaws in German securities laws and companies should be forced to disclose transactions sooner, lawyers and investors said.
German capital market rules don't require companies to disclose holdings until they have a legal right to acquire the stock, said Thomas Moellers, a capital markets law professor at Germany's Augsburg University. Schaeffler Group earlier this year similarly used swap rights to acquire 28 percent of Continental AG before disclosing a takeover bid.
``Porsche was able to use a loophole here, and the lack of transparency distorted the DAX and led to unfair losses by others,'' Moellers said in an interview. ``This example, like the Schaeffler-Conti case, shows that regulatory action is needed.''
Porsche said Oct. 26 that it held 42.6 percent of Volkswagen AG's shares and had secured so-called cash settled options for another 31.5 percent. Volkswagen shares soared almost fourfold the following two days and trading in Volkswagen is being probed by BaFin, Germany's financial-market regulator. Germany's benchmark DAX index rose 12 percent on Oct. 27 and 28 as Volkswagen's shares were pushed up by the Porsche bid.
The tactics have revived criticism that German rules are too lenient. Schaeffler's move to employ swaps in the Continental takeover prompted companies including E.ON AG and Daimler AG to urge the government in July to strengthen disclosure standards.
Frank Gaube, a spokesman for Stuttgart, Germany-based Porsche, declined to comment. He has said previously the company rejects allegations that it manipulated Volkswagen's share price or that it violated securities laws.
Short Sellers
Wolfsburg, Germany-based Volkswagen fell 50 cents to 499.50 euros ($635) in Frankfurt trading. Porsche gained 3.84 euros, or 5.9 percent, to 69.39 euros.
Short sellers, who bet that Volkswagen's price would fall, were forced to buy from a shrinking pool of Volkswagen stock to close their positions in a so-called short squeeze. Short-selling occurs when investors borrow shares and then sell them on the hope that the price will fall.
``The short-sellers got the sharp end of this stick, but the general point is it is not just an issue for short-sellers, but also for the traditional long-term investor,'' said George Dallas, corporate governance director at F&C Asset Management Plc, which oversees the oldest U.K. investment fund. ``Majority control by Porsche was achieved without the minority shareholders being aware, and the market and share price distortions that resulted from the limited free float of shares are not the type of thing long-term investors would like to see.''
Cash-Settled Options
Porsche said that it had cash-settled options equivalent to 31.5 percent of Volkswagen, and that it aimed to control 75 percent of the carmaker in 2009. With the options, Porsche would receive the difference between the undisclosed underlying strike price and the market price for the shares on the day of settlement. ``The shares will be bought in each case at market price,'' the company said in the Oct. 26 statement.
Until Oct. 26, Porsche had said it was aiming only for a stake exceeding 50 percent, and Chief Executive Officer Wendelin Wiedeking said at the Paris Motor Show this month that a stake of as much as 75 percent would be ``not realistic'' because of market turmoil.
While current German disclosure rules meet minimum European Union rules, the U.K. and Switzerland have stricter standards on the use of derivatives.
U.K. Rules
``Porsche couldn't have done this in the U.K., and that's what people in the markets overlooked,'' said Jochen Kindermann, an attorney with Simmons & Simmons in Frankfurt. Investors ``were surprised to hear how few shares were left available all of a sudden.''
The U.K. financial regulator last week said it would adopt rules that force investors that use derivatives to build large stakes in companies to disclose their positions when they control options equivalent to a 3 percent stake in a company.
Kindermann, who advises hedge funds, said he has been contacted by numerous clients this week about the Volkswagen turbulence.
Porsche, which first bought the stock in 2005, had to make a mandatory takeover bid under German law when it boosted its stake above 30 percent in March 2007. This signal wasn't understood clearly by investors and hedge funds, according to Kindermann.
``The crucial issue here is the timing of Porsche's latest disclosure on the 75 percent,'' Kindermann said. ``They were just able to pick and choose the date and time for that one at will.''
Ruediger von Rosen, managing director of the association of German listed corporations, DAI, said any new regulations should be proposed on the European level.
``If hedge funds really fell flat on their face here, I'm not sure that's a compelling reason for new regulation,'' von Rosen said. ``There are always winners and losers in each situation. Everybody has known since 2005 about Porsche's ambitions.''



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Technically all was within legal lines, and any fraud intent will be hard to prove.

But ... IMO Porsche corporate image was hurt significantly in the financial circles.