The Rise and Fall of Adolf Merckle: A Tragic Financial Journey

Introduction

We’re covering the epic rise and fall of German entrepreneur and investor Adolf Merckle. He made his initial fortune by creating the giant German pharmaceutical company Phoenix Pharma Handel and later diversified into other industries.

At his peak in 2007, he was worth 12.8 billion dollars and was the 36th richest man in the world. To fuel his growth, Adolf Merckle took on billions of dollars of business and personal debt. He also took on extremely risky investments.

In 2008, his companies were hit hard by the global financial crisis and subsequent recession. The business empire he spent decades building came crumbling down before his very eyes. In 2009, his net worth had fallen from a high of 12.8 billion dollars down to almost nothing. Unable to handle the loss, he tragically jumped in front of a train to end his suffering on his own terms.

In this article, we’ll go over how Adolf Merckle built his business empire and how it all came crumbling down.

Eary Life of Adolf Merckle

In 1934, Adolf Merckle was born to a wealthy family in Dresden, Germany. At a young age, he took over his grandfather’s chemical wholesale business and turned it into a pharmaceutical wholesaler called Phoenix Pharmahandel.

He had incredible success with the business, and Phoenix grew to have a dominant market position within Germany. He leveraged his expertise in the pharmaceutical industry to create Germany’s first generic drug manufacturer, Ratiofarm, which was also a huge success.

By the late 90s, his pharmaceutical empire made him a billionaire. He lived in a mansion in central Germany with his wife and four kids. But Adolf had even greater ambitions. He wanted to diversify his business empire into even more industries and become even richer.

To this end, he started an investment company called VEM Group, which invested his vast wealth into various businesses. One of VEM’s most significant investments was a multi-billion dollar stake in Heidelberg Cement, a German-based international building materials company.

Heidelberg

In the beginning, this seemed to be a great investment. During the global real estate boom of the early 2000s, there was massive demand for cement for the construction of new real estate projects. This caused Heidelberg’s revenues and profits to explode, and the stock price increased five-fold from 2003 to 2007.

To take further advantage of the booming cement industry, Heidelberg acquired the British cement company Hanson PLC for 8 billion pounds, or roughly 15 billion dollars. This combined entity became the second largest cement company in the world.

To finance the deal, Adolf Merckle’s company VEM borrowed money from banks using its own shares in Heidelberg as collateral. This gave VEM an extremely leveraged position. If the real estate market continued to boom, the company would have tremendous upside from its economies of scale. However, if the market went south, VEM could be put in a position where it’s unable to pay its debts.

The Financial Crisis

In 2008, just one year after Heidelberg’s debt-financed acquisition of Hanson, Lehman Brothers collapsed, triggering the Great Financial Crisis. Millions of people lost their homes, and real estate prices tanked. Real estate development projects ground to a near halt, causing demand for cement to plummet. From 2008 to 2009, Heidelberg’s stock nosedived almost 80 percent as their revenue and profits dried up.

This was very bad for VEM. They had borrowed money against the value of their shares in Heidelberg. When the value plummeted, the banks gave him a margin call. If he wanted to keep VEM afloat, Adolf Merckle needed to come up with billions of dollars of cash in a matter of just a few months.

To do this, he sold his entire stake in Heidelberg as well as his pharmaceutical company Ratiofarm. However, the financial crisis caused the value of these assets to be depressed. They were not enough to cover his margin call.

To save VEM from insolvency, he offered up his own private assets as collateral. He was putting everything he had on the line. The loss of Heidelberg wiped out the majority of his net worth, but he still had a few hundred million euros left. While Adolf Merckle was still incredibly rich by most people’s standards, he wanted to reclaim his billionaire status. He decided he would put all of his remaining chips on the table in a final gamble to make back his fortune. With the amount of money that he was betting, a regular casino wouldn’t cut it, so he turned to the world’s biggest casino: the stock market.

Adolf Merckle started doing due diligence on stocks, focusing mainly on German companies as this was his area of expertise. Adolf Merckle thought of an investment that could profit off of the very recession which cost him his fortune in the first place.

In 2008, unemployment was on the rise across the globe, and people’s discretionary income was falling rapidly. Auto sales were plummeting as people didn’t have money to buy new cars, and banks were tightening up their financing standards.

Based on his extensive analysis, he decided that he would short Volkswagen stock. This seemed like a foolproof idea; with the headwinds facing the auto industry, VW’s business would surely tank, bringing its share price down with it.

However, shortly after Adolf Merckle made the position, VW stock went to the moon. It 5x’d in value in what eventually came to be called the Infinity Squeeze. Volkswagen was a popular stock for short sellers as the fundamentals of the business were deteriorating, but the stock price remained stubbornly high.

As it turned out, the share price was being supported by Porsche, who was secretly buying up shares in VW in a bid to eventually acquire the company. In October of 2008, Porsche shocked the investing world when it announced that it had built up a 74 percent stake in Volkswagen.

An additional 20 percent of the stock was owned by the German state of Saxony, leaving the free float of the company very low. When this was announced, all the short sellers immediately rushed to cover their positions, causing a massive short squeeze. This pushed VW’s market cap up to 400 billion dollars, briefly surpassing ExxonMobil to become the most valuable company in the world.

Volkswagen

“And again, it’s all down to Volkswagen. What is going on here is unbelievable. The share nearly doubled this morning. It reached a level of 1005 euros, and already yesterday, the car maker rose 147 percent, causing the DAX to stay in positive territory when the rest of Europe was declining. What is really going on here is very hard to say. It must be the worst-case scenario short squeeze one can, in fact, imagine.

“It’s all about Porsche saying over the weekend that they hold 42.6 percent in Volkswagen currently and another 31.5 percent via option. So, indirectly, Porsche holds nearly 75 percent. The federal state of Lower Saxony holds another 20.2 percent, so just over 20 percent. So effectively, there’s only a tiny free float left of just under six percent, 5.7 percent. If everybody is short in a share with such a tiny free float, if those two things come together, then that can cause these severe disruptions that we’re seeing again today.”

One analyst put it: each and every short seller in the world is trying to close up their positions, and there’s no way they can do it except by trying to buy like mad. Among investors, many had bet on VW’s share price to fall. The share’s recent move is all down to covering of short positions rather than any fundamentals because they don’t look as good as you might suggest when looking at the share price.

That is also having a severe effect on the other members of the DAX, such as the index heavyweights Allianz, Siemens, and EON, because index-tracking funds are selling the 29 other companies listed in the index to catch up with Volkswagen.

It’s a big embarrassment for the German market. They need to get it done, they need to get it sorted, and they need to figure out a way of doing this.

Volkswagen Short Squeeze

We have an article explaining the Volkswagen short squeeze in greater detail. You can read the article. When the squeeze happened, Adolf Merckle was forced to cover the position at the highs. Although the exact size of his position is undisclosed, it is estimated that he lost hundreds of millions of euros on the trade. This single loss wiped out almost all the net worth he had remaining. By this point, he had finally lost everything.

A few months later, in January of 2009, Adolf Merckle finally had had enough. He jumped in front of a train near his hometown, leaving behind his wife and four kids. The story of Adolf Merckle is a tragic and sobering tale. He was a great businessman and investor, having created two multi-billion dollar pharmaceutical companies.

Almost all of the investment disasters we cover on this channel have one thing in common: excessive financial leverage. Adolf Merckle stretched his financial firepower too thin, making him extremely vulnerable when the market finally moved against him. Alright guys, that wraps it up for this video. What do you think about Adolf Merckle’s investments? Let us know in the comments section below.