Shares of Volkswagen AG jumped an eye-popping 93 percent on Tuesday after a similar surge the day before. Speculation on the reason centered on hedge funds needing to unwind bad bets on the share’s direction.
The immediate rise in VW share value — at one point, its market capitalization made it more valuable than Exxon Corp. — prompted German regulators to declare they were looking into the reasons for the explosive growth.
The surge came amid reports that hedge funds had been forced to buy scarce shares at high prices after mistakenly betting the shares would fall.
But with Porsche now holding nearly 43 percent of the company, and options to reach 75 percent by next year, that left a shortage of shares. If investors had shorted the stock by selling borrowed shares, they would need to buy shares in order to complete the deal.
On Sunday, Porsche Automobile Holding SE, which owns the company that makes the 911, Cayenne and upcoming Panamera sedan, said it increased its stake in VW to nearly 43 percent plus options, with an eye toward 50 percent by the end of 2008.
That started pushing VW shares into the stratosphere. On Monday, they were up nearly 147 percent to close at 520 euros ($651.35) compared with Friday’s closing price of 210.85 euros ($264.41).
On Tuesday, Wolfsburg-based Volkswagen’s shares spiked as high as 1,005 euros ($1,256) in Frankfurt trading Tuesday, nearly doubling Monday’s close. At that level, Volkswagen was worth some 296 billion euros ($370.8 billion), greater than Exxon’s market cap of $343 billion.
They later settled back to close at 945 euros ($1,183.70) — a gain of 81.7 percent. Some 12.3 million shares traded hands Tuesday.
German financial markets regulator BaFin said it was looking into the recent history of Volkswagen share trading to see if there has been any market manipulation or insider trading. “Since September the Volkswagen share has gone up and down dramatically,” Anja Engelland, a spokeswoman, said.
“We’re looking at the trading, the history of the shares. We’ve been monitoring, and started analyzing since the beginning of October.”
She said BaFin is curious to see if “someone manipulated the market or was involved in insider trading. That doesn’t mean we’ve found anything. We’ll continue to check.”
The German state of Lower Saxony, where Volkswagen’s headquarters is based, holds just over 20 percent of the company’s shares. Analysts said that because Porsche has acquired a big part of Volkswagen’s shares, the amount of freely floating shares is low, at only 6 or 7 percent. Scarce supply of shares could exaggerate any market moves.
Ulrich Horstmann, an analyst with Bayerische Landesbank, did not believe the rapid surge could continue. He said Volkswagen shares would most likely fall in the next months because the fair value on Volkswagen is really closer to 150 euros ($187.50).
“The (rising share price) could be part of the speculation on Porsche’s options,” Horstmann said.
“We don’t have any information on the derivatives on the market or Porsche’s buying; we just know that they want 75 percent and that there aren’t many shares left,” he said. “It seems Porsche is really successful in the derivative business. It’s crazy and really untypical of the market.”
Another analyst said when a share price goes as high as 1,000 euros, ($1,250), one doesn’t have to have a large position to get burned.
“I suppose someone else is on the other side of the share’s movement and it’s probably painful; perhaps terminally for some,” he said.
Porsche was already Volkswagen’s biggest shareholder when it announced in the stake increase.
Stuttgart-based Porsche said “the goal remains, as long as the financial conditions are right” to increase its holding to 75 percent next year.
“Yesterday, VW has almost doubled its market capitalization,” said Oliver Roth, the director of equities trading at Close Brothers Seydler AG on Frankfurt exchange floor. “That’s crazy; they should stop trading that share.”
Torsten Baar, a spokesman for Frankfurt exchange operator Deutsche Boerse AG, said the Volkswagen stock would remain in trade as long as it still has a free float of 5 percent.
“We don’t know exactly where it is at the moment,” Baar said. “They’re close. Yesterday they were around 2 percent away from there.”
Baar said the exchange makes its free float calculations at the end of the trading day.
Porsche shares fell on Monday, but reversed course on Tuesday, rising nearly 10 percent to close at 46 euros ($57.61).
By GEORGE FREY
October 28, 2008, 5:33PM ET