How Porsche cashed in on Volkswagen

Here's the article, but I've summarized it below. Reading about it on Wiki, it seems like most of this happened at the end of last week. (Come to find there are some disparities between the two articles, but the non-Wiki story is way more interesting, so I'll use that when necessary)

In March 2007, Porsche began increasing its stake in Volkwagen, "its most important partner", amid fears that VW would be bought up by hedge funds and subsequently dismantled and liquidated (I'm trying to resist the "chopped up for parts" pun), Porsche increased its stake in the company to about 30%.

Over the next year and a half Porsche continued to buy stock in VW (which they did not "finally reveal" until October 2008). Over that time, as Porsche continued to buy up the stock, the price of it increased. Of course, hedge fund managers could see that the price was going up without any new news about the company, and so reasoned (correctly) that the new price had been artificially inflated. So they bet on the stock to fall.

How does one actually bet on a stock to fall? This is something few people understand. It's not quite the same as betting in Vegas. Short-selling, as it's called, involves entering into an agreement wherein you receive money (in the amount of the current stock price) now and are obligated to return a share of the stock later. So if the current price is $50 and the future price is $40, you can receive $50 today and are then obliged to return a share of stock later. Typically, then, to return the stock you would just buy a share at that day's price and transfer it to the other person.

I'm just going to make up numbers in this part ... So shares of VW had a true value of, say, $60. Thanks to Porsche buying up all the shares, the price had been inflated to $80. Betting this "bubble" would burst, the hedge funds shorted the stock.

Except it turns out that Porsche now owned 75% of VW - nearly all the stock that is available for purchase. And Porsche didn't want to sell it, so they priced it at $100, which they could do because they basically held a monopoly on the stock.

Why is this a problem for the hedge funds? By shorting the stock, they had an obligation to return a share of the stock to its original owner (Porsche). So on the day it came due, each one had to go buy a share at the market price and give it up - except now the market price was $100, even though the stock was still only worth $60.

And according to the article, that's how a company with $8 billion in annual revenue made $10 billion playing the market.