The second para. below confirms that "Porsche's takeover demand would target the latter [ordinaries] rather than the former [preference]." Then why did investors like Albert Bridge Capital "short the ords and long the prefs"?
Perhaps I will ask this as a separate question...I also don't grasp why VW's "share price would fall as soon as Porsche got control and stopped buying".
Kindly explain in most simple English. I don't know German law. I don't want to know all the history behind Porsche and Volkswagen's rivalry.
In Germany, this tactic gained traction thanks to the Teutonic tradition of dual-share classes. According to a paper by Katie Bentel and Gabriel Walter, the practice dates back to the 1980s, where preference shares — which carry no voting rights but a fixed dividend — became popular as to protect German companies from both hostile takeovers and foreign influence. The outside investors got their dividends, and local owners kept control through the ordinary shares. Everyone was happy.
I don't quote four paragraphs in between.
Attention quickly turned to Volkswagen, where the preference shares traded at a significant discount to the ordinaries, in part because Porsche's takeover demand would target the latter rather than the former.
I don't quote many paragraphs in between.
Funds like Albert Bridge Capital piled in. Here's how they described the trade:
By late August, the prefs [preference shares] were trading at €100 per share, but the ords [ordinary shares] were twice the price at €200. Consequently, nearly everyone and their brother were short the ords and long the prefs, in what some viewed as a riskless trade. We, however, were not short. It felt like such a consensus trade and we knew that Porsche were suspiciously adept at playing the markets (and playing market participants).
But then, just three weeks later, the premium was over 3x (the prefs were at €90 and the ords at €270). That was enough for us to eliminate our “be anti-consensus” requirement, and we threw in the towel and got short in late September in two tranches at €261 and €278 — with the underlying value (represented by the prefs) nearly 70 per cent lower.