01-Ford-Motor-Company-s-Value---Enhancement-Plan(A

9-201-079REV:MARCH28,2002________________________________________________________________________________________________________________ProfessorAndréF.Peroldpreparedthiscase.HBScasesaredevelopedsolelyasthebasisforclassdiscussion.Casesarenotintendedtoserveasendorsements,sourcesofprimarydata,orillustrationsofeffectiveorineffectivemanagement.Copyright©2001PresidentandFellowsofHarvardCollege.Toordercopiesorrequestpermissiontoreproducematerials,call1-800-545-7685,writeHarvardBusinessSchoolPublishing,Boston,MA02163,orgoto—electronic,mechanical,photocopying,recording,orotherwise—withoutthepermissionofHarvardBusinessSchool.ANDRÉF.PEROLDFordMotorCompany'sValueEnhancementPlan(A)OnApril14,2000,FordMotorCo.announcedashareholderValueEnhancementPlan(VEP)tosignificantlyrecapitalizethefirm’sownershipstructure.Fordhadaccumulated$23billionincashreserves,closetothecompany’slargestevercashpositionandsignificantrelativetoFord’s$57billionequitymarketcapitalization.UndertheVEP,Fordwouldreturnasmuchas$10billionofthiscashtoshareholders.Inexchangeforeachsharecurrentlyheld,theplanwouldgivestockholdersonenewshareplusthechoiceofreceiving$20eitherincashoradditionalnewFordcommonshares.FordalsoannouncedthatitwoulddistributeownershipofitsVisteonCorp.partsunittoshareholders.Ford’ssharepricehadperformedpoorlyoverthepreviousyear(Exhibit1),andtheproposaldrewapositivereactionfromanalystswhohadbeenurgingthecompanyformonthstodistributecashtostockholders.SomehailedtheVEPastheboldeststepyetbyFordChairmanWilliamClayFordJr.andChiefExecutiveOfficerJacquesNassertoconvinceinvestorsthattheywereundervaluingtheworld’sNo.2automaker.However,theplanraisedanumberofquestionsforinvestors.WhywasFordproposingthistransactioninsteadofatraditionalsharerepurchaseoracashdividend?HowdidtheinterestsoftheFordfamilyfactorintothisdecision,andwhatdidthetransactionimplyaboutthefutureinvolvementofthefamilyinthecompany?WhywasForddistributingsuchasignificantamountofcashatthisparticularpointintime?Didthedistributionsignalachangeinthecompany’sappetiteformakingacquisitionsorfuturecapitalexpenditures?Ifshareholderscollectivelyelectedtoreceivelessthan$10billionincash,howwouldForddistributetheremainingcash?FordMotorCompanyHeadquarteredinDearborn,Michigan,FordMotorCompanywastheworld’slargestproduceroftrucksand,afterGeneralMotors,thesecond-largestproducerofcarsandtruckscombined.Fordalsoengagedinotherbusinesses,includingmanufacturingautomotivecomponentsandsystemsandfinancingandrentingvehiclesandequipment.Thecompanyhadengagedinlimiteddiversificationinthe1950sand1960s,butbythe1990sithadrefocusedattentiononitsautomotivebusinessesandfinancialservices.Fordalsohadgrownsignificantlybyacquisition.RecentmajortransactionsincludedFord’spurchaseofHertzCorporationin1987,JaguarCarsin1989,VolvoCarsin1999,andLandRoverinearly2000.201-079FordMotorCompany’sValueEnhancementPlan(A)2Fordcompetedinanindustrythatwasnotoriouslysensitivetotheeconomiccycle.(SeeExhibit2fortherelationshipbetweenU.S.autoindustrysalesandGDPgrowth.)Carcompanieswouldseelargeswingsintheircashflowsaseconomicgrowthandtheinterestratesfluctuated.Theindustrywasparticularlybadlyhitduringtheoilcrisisofthelate1970sandearly1980swhentheUnitedStatesexperiencedrecorddouble-digitinflationandtreasurybillsyieldedalmost20%.In1980,Chryslerwassavedfrombankruptcybyagovernmentbailoutthattooktheformof$1.5billionofloanguarantees.OverthefiveyearsendingDecember31,1981,Ford’sequitymarketvaluefellfrom$5.8billionto$2.0billion.Itreboundedrapidlythenextyear—morethandoubling—aseconomicconditionsimproved.ThehistoryofFordMotorCompanydatesbacktoitsfoundingbyHenryFordand11investorsin1903.Atthattime,carswerecustommade,unreliable,andcostlynovelties.Fordwantedtomakethemsimple,inexpensivenecessities.“Thewaytomakeautomobilesistomakeoneautomobilelikeanotherautomobile,tomakethemallalike,tomakethemcomethroughthefactoryjustalike,justasonepinislikeanotherpinwhenitcomesfromthepinfactory,”hesaidwhenthecompanywasfounded.1Unwaveringinthisvision,HenryForddidnoteasilysharecontroland,by1906,hehadacquiredamajoritypositioninthecompany'sstock.In1919,whentheminoritystockholdersbalkedatbuildingthegiant(andexpensive)RiverRougePlantinDearborn,Michigan,HenryFordboughtthemout.Asaresult,Ford,hiswife,Clara,andtheironlyson,Edsel,acquiredfullownership.Fordwouldsoonbecomethenation’sthirdbillionaireafterAndrewCarnegie(steel)andJohnD.Rockefeller(oil).“RockefellerattheheightofhisinvolvementinStandardOilhadownednomorethan27percentofthatcompany’sstock.Bycontrast,HenryownedalloftheFordMotorCompany,whichgavehimapowernootherAmericanindustrialisthadeverpossessed.”2InJanuary1956,FordMotorCompanysoldsharestothepublic.Untilthen,theFordfamilyandtheFordFoundation(formedin1936)hadbeenthecompany’ssolestockholders.TheFordFoundationheldbyfarthemajorityofthesharesoutstanding,althoughitsholdingswerenon-votingClassAsharesreceiveduponthedeathsofEdselFordin1942andHenryFordin1947.