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How VW Became the World's Biggest Company -- For Five Minutes

For a brief and bizarre time earlier today, Volkswagen was the world's most valuable company.

In normal times, energy titan ExxonMobil 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 today, besting ExxonMobil'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 today:

Twenty percent of the company is owned by Lower Saxony, the home state of Volkswagen in Germany. (This would be like Michigan owning 20 percent of GM.)

Investors thought that German sports car maker Porsche owned another 42 percent of VW. But Porsche announced on Monday that it had secretly purchased enough VW options to push its ownership stake up to 74 percent. The aggressive Porsche wants control of VW to get its hand on the automaker's strong cash flows.

That means there is a lot less VW stock available for purchase than had been thought.

And that sent a certain kind of VW investor into a panic: the short-sellers.

Lots of people thought VW had long been overvalued, so they took "short" positions on the stock -- betting that VW stock would eventually go down. Short-sellers make their money when a company's stock loses value. The short-sellers had sold VW stock betting 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 VW 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 VW stock available to buy.

This meant supply-and-demand kicked in: Because there was so much less VW stock available, the price per share shot up. Short-sellers scrambled to buy back the stock before it went too high. This rush of buying sent the stock price even higher, as the cycle continued.

It was like astronauts gasping 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 upward, pushing VW past ExxonMobil as the world's most valuable company.

Here's how weird it got: At the height of the frenzy, Porsche's stake in VW was worth $127 billion. Porsche itself was worth only $11 billion.

VW shares have settled somewhat since the panic, and ExxonMobil has resumed its rightful place atop the globe.

As the Germans might say, "Ach der lieber!"

-- Frank Ahrens

The Ticker is Twittering!

By Frank Ahrens  |  October 28, 2008; 2:00 PM ET
Categories:  The Ticker  
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