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Case study 3
Porsche, Volkswagen, and CSX
1. Summary
This case examines two examples of how equity derivatives have been used to gain leverage and corporate control for activist purposes. In 2008, Porsche’s CFO carried out the “short squeeze” to acquire control over Volkswagen through option contracts, which lead to huge losses for short-selling hedge funds. And meanwhile in 2007, TCI and 3G, 2 UK-based hedge funds, violated SEC disclosure requirements by hiding their intentions to takeover CSX by entering into equity total return swaps with lots kind of investment banks. CSX was a one of the largest railroad and transport companies in Eastern US. This report argued the similarities and differences between the two parts of the case, also talked about the risks, and explain why did VW’s share price rise fivefold Porsche’s disclosure regarding cash settled options, and the conclusion is given at last.
2. Introduction
The Porsche and TCI/3G cases are two different examples of investor groups that tried to gain control of a company using derivatives. In the first example, German auto manufacturer Porsche engaged to gain control over Volkswagen. Since 2005, Porsche had been purchasing cash-settled call spread options on Volkswagen stock. By 2008, Porsche held a 42.6% direct ownership in VW by hiding their intentions that they won’t take its position up to 75%. However, Porsche had purchased an additional 31.5% synthetic long position by using the cash-settled call spread options, which lead to VW’s share price dramatically increased fivefold.
In the second example, TCI and 3G, attempted to obtain significant control over the American railroad company CSX by using Total Return Swaps (TRS). They sought to add 5 independent directors to CSX’s board. In 2008, CSX had learned that TCI/3G had accumulated 14% of CSX’s shares, with a notional value of more than $2.5 billion. CSX changed their by laws so that special meetings only be called after CSX received written



References: 1. http://www.slideshare.net/guestd1219b/vw-porsche-case-study-1608137, Vw Porsche Case Study, 2014. 2. http://www.investopedia.com/terms/t/totalreturnswap.asp, 2014. 3. http://www.investopedia.com/terms/p/pairstrade.asp, 2014.

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