Ford Motor Company Case Essay

crossway Motor Company Case1. Does Ford give way in like manner much specie?2. How does VEP work?3. What are the alternatives for distributing hard currency?4. What problems is the VEP plan designed to break up?5. As a shareholder, how would you approve the VEP? Would you elect immediate payment or carry? Q.1) Does Ford have too much cash?Exhibit 6, 8, and 9 (figures in $ millions) provides selected balance saddlery items for Ford, General Motors, and DaimlerChrylser. The given information indicates that Ford carries the highest heart and soul of cash and marketable securities among the three companies. In 1999, Ford had $25,173 of cash and marketable securities while General Motors and Daimler-Chrylser have only $12,140 and $9,163. Comparing at an industry level, we as a team inferred that Ford may be carrying too much cash.Ford competes in an industry that is notoriously sensitive to the economic cycle, and gener whollyy companies in cyclical industries have to keep cash in reserve to cover up for cyclical downturns. However, high amount of cash in the balance sheet does not necessary signal that a companys future earnings has a high potential of growth. A company sitting on cash tends to lose the opportunity to gain high restitutions generated from expanding business or investing in new projects. Keeping excess cash in the situate would be a mistake when the company could use the cash to earn a higher return than the companys cost of capital.It is important to lower that although Ford holds the highest amount of cash, both Fords earnings per share of 5.86 and extraction harm of $51.38 are lower than General Motors and DaimlerChrysler in 1999. Fords higher debt to equity ratio during this period may be the reason that caused the companys cost of capital to increase and eventually decreasing the stock price.Q.2) How does VEP work?The main function of the Value Enhancement Plan (VEP) consists of both the options of stock repurchase and a stock ex change. Through this plan, shareholders would exchange their existing mutual stock and class B shares,one-for-one for new Ford universal and new class B shares. Moreover, shareholders would receive either $20 per share in cash or the equivalent value in new Ford common shares based on Fords price in July 2000. Shareholders who did not devote an election would be treated as if they made a $20 all-cash election. Meanwhile, if the cash option was oversubscribed, the $20-per-share payment would be distributed pro rata to ensure that the company distributed at most $10 cardinal. Dividends on the new shares would be reduced such that shareholders who elected stock only would get the same dividend payment on their computer software as the quarterly $.50 per share currently being paid. A third option the company offers to the shareholders allows them to receive a combination of cash and stock cost of $20.Q.3) What are the alternatives for distributing cash?Share Repurchase Institution al shareholders urged Ford to conduct share repurchase over paying dividends. But Ford preferred receiving cash dividends since that provided the family members with liquidity without having to sell Class B shares and run the risk of diluting familys control. (Ford had 1.15billion common shares and 70.9million Class B shares outstanding. The family retained a 40% vote as long as it owned 60.7 million shares. Reduction below 60.7million until 33.7million would reduce the familys voting power to 30%. Below 33.7% of Class B shares ownership, all privileges would be lost) Mr. Ford had said that the family had agreed to take its portion of the distribution in the form of new common shares, not cash. The family thus would have tens of millions of common shares to sell for liquidity purposes without reducing their holding of Class B shares. Pay Dividends UniformlyW.r.t. the Value Enhancement Plan, dividends on new shares would be reduced as there was a $10billion limit to distribute cash. Dividends with incremental growth in value are absent. Ford wants to keep a large amount of cash to itself because of the uncertainty associated with the cash flow. It has the option to distribute the cash in the form of dividends. Shareholders were taxed on cash dividends at ordinary income rates whereas gains realized on shares that were repurchased standard capital gains treatment. There were no cash deductions for the company in the above two methods. Hence both theprocedures were same for the company.4. What problem is the VEP plan designed to solve?The primary reason why Ford designed the VEP was that Ford believed its stock was undervalued and the undervalued stock was limiting the companys ability to use its stock for acquisitions or to attract, retain or incentivize employees. Ford thought the VEP would enhance the value of its outstanding shares because the recapitalization will highlight its cash reserves and cash flow generating capacity, and also indicates guidances c onfidence in the future of the business. In addition, Ford believed the adjustments in the employee incentive plans by the recapitalization will tie Ford managements compensation even more closely to the performance of its stock price. Additionally, as a part of VEP, Ford announced the Visteon spinoff was not only designed to allow Ford to focus on its core business but also give Visteon a chance to build its client base outside Ford. However, some analysts and shareholders (TIAA-Cref, Calpers) argued that the VEP was designed to avoid a risk that Ford could face due to a share buyback. Because a share repurchase would reduce its voting right in the company, the Ford family considered VEP as a suitable option.5. As a shareholder, how would you approve the VEP? Would you elect cash or stock? At face value the VEP seems to be a good idea return value to stockholders in the form of cash, without having to compromise control over the company. As is gleaned from the expression, Ford ha s approximately 23 billion dollars in cash reserves with the proposed VEP set to return up to 10 billion USD back to shareholders. Executive leadership tout flexibility,liquidity and alignment as advantages of the proposed project, however, a couple of valid questions have been raised (two institutional investors in particular). The proposed VEP if successful would see the cash reserves of the company reduced by 10 billion, this drastic reduction in cash will send mixed signals to analysts and the market as a whole. It could be perceived as a ploy to return money to shareholders in anticipation of a wind down or poor run of performance.Though flexibility and realignment is mentioned, that does not seem to be the case.The course of study only allows owners of both common shares and class B shares the opportunity to obtain liquiditywithout having to lose control of their class B shares. The program will have the Ford family exchanging their common shares for the new stock in addition to the $20 or new stock options. This is particularly a welcome boon (as the case alludes to their need for liquidity to handle settlement of divorces and estate taxes). If the stock of Ford is perceived undervalued then the advice would be for the shareholder to approve the VEP as the share price increases in an addition to the opportunity to reinvest in the additional new common stocks. In conclusion we would not approve of the VEP as we believe the benefits of the program does not benefit all stockholders, rather the pros are stacked in favor of the Ford family. On the contrary a common stockholder will accept the VEP and accept cash payment if the stock was perceived to be overvalued and further stock options if the stock was perceived to be undervalued.The End.