Case Detail

Case Summary

Porsche, Volkswagen, and CSX: Cars, Trains, and Derivatives

Case Number: 5-209-250, Year Published: 2009

HBS Number: KEL417

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Authors: David Stowell; Theron McLarty

Key Concepts

Equity Derivatives, Total Return Swaps, Beneficial Control, Disclosure


Family members knew something was very wrong when Adolf Merckle, who had guided the family holding company, VEM Vermögensverwaltung GmbH, through dozens of successful investments, left the house one afternoon in January 2009 and failed to return. That night their fears were confirmed when a German railway worker located Merckle’s body near a commuter train line near his hometown of Blaubeuren, about a hundred miles west of Munich.

It was no secret that the recent financial crisis had taken a toll on Merckle’s investments. He was known in Germany as a savvy investor, but had lost hundreds of millions of Euros after being caught on the wrong side of a short squeeze of epic proportions involving Volkswagen stock. This was not the only large bet against that company’s stock. A number of hedge funds, including Greenlight Capital, SAC Capital, Glenview Capital, Tiger Asia, and Perry Capital, lost billions of Euros in a few hours based on their large short positions in Volkswagen’s stock following the news on October 26, 2008, that Porsche AG had obtained a large long synthetic position in Volkswagen stock through cash-settled options. In the next two days, this short squeeze produced a fivefold increase in Volkswagen’s share price, as demand for shares from hedge funds exceeded the supply of borrowable shares.

Learning Objectives

This case focuses on the massive equity derivative positions entered into by Porsche in relation to Volkswagen stock and by TCI and 3G in relation to CSX stock. Students will learn how equity exposure can be created without buying stock and without prior disclosure. The role of regulators, courts, and investment banks that facilitate these transactions is also explored.

Number of Pages: 10

Extended Case Information

Teaching Areas: Finance

Teaching Note Available: Yes

Geographic: Global

Industry: Transportation, Investment Banking, Hedge Funds

Organization Name: Porsche, Volkswagen, and CSX

Organization Size: Large

Decision Maker Position: CEO, CFO

Decision Maker Gender: Male

Year of Case: 2008