Ford Motor Company was founded by Henry Ford and 11 investors in 1903. The company is based out of Dearborn, Michigan. Ford Motors is a worldwide company, with 335,000 employees, operating in 25 countries and on six continents. Ford changed the way cars were made with their innovative assembly production methods. Having gone public in 1956, the company grew to become the world’s largest truck manufacturer and the second largest total automotive manufacturer. In addition to manufacturing cars and trucks, they are involved in producing components/systems and are engaged in financing and rentals.
Ford experienced significant growth derived from company acquisitions. The ...view middle of the document...
With a poorly performing stock price and pressure to return excess cash to shareholders, Ford worked with Goldman Sachs to develop a Value Enhancement Plan (VEP). Outlined in the VEP, the firms ownership would be recapitalized and $10 million would be returned to shareholders in the form of cash or stock. We will analyze whether Ford has too much cash, the alternatives to distributing cash, how the value enhancement plans works and what problems the plan seeks to solve, and whether shareholders should back the plan.
Too much cash for Ford
Ford had accumulated $23 billion in cash reserves by April 14, 2000, and this amount of money represented for 40% of its market capitalization. On the other hand, the competitors of Ford such as GM and Chrysler had accumulated cash reserve of $12B and $9B respectively. There are many ways to calculate the cash efficiency of a company, here we can use return on cash to evaluate. If we calculated the return on cash(Net income over cash and equivalents) to see how many net income has been used on per cash, we can see that Ford had 30.7% in 1999 which is way beyond GM(49%) and Chrylser(63%). This ratio states clearly that Ford may have excess cash balance on hand.
Net Income/Cash | 1999 | 1998 |
Ford(From 10-K) | 30.7% | 25.7% |
GM | 49.4% | 28.8% |
Chrylser | 63.1% | 25.7% |
Value Enhancement Plan(VEP)
The Value Enhancement Plan(VEP) typically provided shareholders a way to increase their current holdings or to liquefy their shares at a set price. For every share of existing Ford common and Class B shares, the shareholders would receive one-for-one new Ford common or Class B shares plus a $20 bonus in cash or equivalent value in new common shares. According to the case, shareholders who elected the share option would receive 0.748 new Ford common shares in lieu of $20 cash, the impact was similar to 1.748 for 1 stock split. Therefore, shareholders could decide whether to (1) receive all the $20 in cash, (2) convert the $20 to shares(1.748 for 1 stock split), or (3) take part of the $20 in cash and revert the remain to shares. For those who didn’t elect, they would receive cash by default. According to the announcement of Ford, it expected 40% of shareholders would take the cash option, and 20% or more of the shareholders might choose the option with partial cash and partial shares.
Currently both salaried and hourly employees owned around 200 million shares, they would be able to choose from the options we mentioned before as well; however, different from the shares of public stockholders, the shares of employees would be reinvested through open market if the employees didn’t make choice. For the stock options, which allow employees to buy Ford common shares at a discount price, would have new transferred regulations for number of shares and purchase price. Ford will also spin-off Visteon to shareholders. Visteon has $19 billion in revenue, and the actual spin-off would occur on June 28,...