By Frank Ahrens
Washington Post Staff Writer
Wednesday, October 29, 2008
For a brief and bizarre time yesterday, Volkswagen was the world's most valuable company.
In normal times, energy titan Exxon Mobil is the world's most valuable company. But these are not normal times.
Thanks to a complex series of events involving Volkswagen's stock -- during a time of unique global economic uncertainty -- the German automaker's value topped $370 billion yesterday, besting Exxon's value, or market capitalization, of $343 billion, based on its Monday stock close.
A company's value, or market cap, is determined by multiplying its stock price by the number of outstanding shares of stock.
Here's what happened with Volkswagen yesterday:
Twenty percent of the company is owned by Lower Saxony, Volkswagen's home state in Germany. (This would be like Michigan owning 20 percent of General Motors.)
Investors thought Porsche, the German sports-car maker, owned 42 percent of Volkswagen. But Porsche announced Monday that it had secretly purchased enough Volkswagen options to push its potential ownership stake up to 74 percent. The aggressive Porsche wants control of Volkswagen to get its hand on the automaker's strong cash flow.
That means there is a lot less Volkswagen stock available for purchase than had been thought.
And that sent a certain kind of Volkswagen investor into a panic: the short-seller.
Lots of people thought Volkswagen had long been overvalued, so they took "short" positions on the stock -- betting that the stock would eventually go down. Short-sellers make their money when a company's stock loses value. The short-sellers had sold Volkswagen stock betting that it would go down and they could buy it back at a lower price.
It's a risky bet. The short-sellers assumed there was plenty of Volkswagen stock still out there for the buying, which would bring down the value of each share. But when Porsche revealed its secret buying spree, short-sellers realized there was a lot less stock available.
This meant that supply and demand kicked in: Because there was so much less Volkswagen stock available, the price per share shot up. Short-sellers scrambled to buy back the stock before it rose too high. This rush of buying sent the stock price even higher as the cycle continued.
It was as if astronauts were out-gulping each other for the remaining air in a space capsule: The more they breathe, the less air there is, and the more valuable it becomes.
As the buying frenzy pushed up the share price, the company's value, or market cap, rocketed, pushing Volkswagen past Exxon as the world's most valuable company.
Here's how weird it got: At the height of the frenzy, Porsche's stake in Volkswagen was worth $127 billion. Porsche itself was worth only $11 billion.
Volkswagen shares have settled somewhat since the panic, and Exxon has resumed its rightful place atop the globe.
As the Germans might say, "Ach du lieber!"