...February 15, 2014 Subject: Ford’s Shareholder Value Enhancement Plan (VEP) Evaluation Ford Motor Company Ford Motor Company is an American automaker, it is the world's fifth largest automaker based on worldwide vehicle sales. Its headquarters are based in Dearborn, Michigan, which is a suburb in Detroit. Henry Ford founded Ford Motor Company on June 16, 1903 and it became one of the largest and most profitable companies in the world, as well as being one of the few to survive the Great Depression. Ford Company is the largest family-controlled company in the world; it has been in continuous family power for over 110 years. Ford now incorporates two brands: Ford and Lincoln. Ford once owned 5 other luxury brands which where were Volvo, Land Rover, Jaguar, Aston Martin and Mercury. But over time those brands were sold to other companies and Mercury was discontinued. Nasser was CEO of Ford Motor Company from 1998 to 2001. Todays CEO is Alan Mulally. Brief Summary of the Article The article talks about how in April 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to recapitalize the company’s ownership structure. Ford had accumulated $23 billion in cash reserves and under the VEP would return as much as $10 billion of this cash to shareholders. For each share currently held, the plan would give stockholders one new share in addition to choosing either $20 in cash or additional new Ford common shares. Shareholders that would choose to receive cash...
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...Background 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 acquisitions leading up to 2000 consisted of Hertz Co., Jaguar, Volvo, and Land Rover. Auto industry sales are sensitive to the economic cycle. Echoing this notion, Ford’s sales tend to experience volatility during times of economic recessions and booms. In these turbulent times, the company has a high variability of cash on hand and equity market value. In 1999, Ford had a net income of $7.2 billion (approximate 4.5% profit margin), and revenues of $162.6 billion. Ford’s automotive segment accounts for 85% of total revenue. Their US car and truck sales are responsible for 24.1% of the total market share. As of 2000, Ford had 1.15 billion common shares of stock and 70.9 million shares of Class B stock. Among these two shares, the Ford family held all Class B shares, which gave them special voting...
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...Case Study: Ford Motor Company’s VEP Question 1 Go ahead with the Value Enhancement Plan The feature of having both cash and new share options makes the VEP have its strengths and makes an excellence choice for Ford Motor Company. The cash option solves the problem of Ford having massive amounts of extra cash. Since Ford has no profitable activities for the extensive amounts of cash, returning the excess cash to shareholders allows them to make profitable investments. Different from a cash dividend, the returned cash will be taxed as capital gain and therefore achieves tax efficiency for the shareholders. When looking at the company’s point of view, they are able to lower the dividend payment because there will be an increase in number of shares. This would result in the dividend amount per share to most likely decrease and the total amount allocated to a dividend payment to stay constant. This will make dividends for the new Ford shares to go down because share price falls. Those who elect the $20 cash payout will maintain ownership of the same amount of shares they previously owned, therefore, the total dividend payment then becomes reduced. As a result of the cash payout, the number of new shares outstanding will reduce, this increases the earnings per share and, because of the increased rarity of shares, the overall demand for Ford's shares will increase. With higher demand in shares, comes a higher share price in the future. The stock option satisfies the shareholders...
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...FORD MOTORS CORP - VALUE ENHANCEMENT PLAN 1. Does Ford have too much cash? • Liquidity Analysis: Quick Ratio and Current Ratio. Find the industry standard and compare! • Opportunity Cost of holding cash versus Capital Gain for spending that idle cash! • Solvency to understand the risks incurred by the firm and verifies it against an optimal capital structure. • Ford has made past acquisitions and has exhausted that list by purchasing Jaguar Cars, Volvo Cars, and Land Rover. Investment in expansion without a solid reason would prove to be futile. • The availability of cash incentivizes the management to shirk their work and thereby leading to downfall in profits. • Find operating leverage: Debt to Capital ratio! 2. How does VEP work? VEP is one of the powerful strategies applied by the company to make itself intrinsically valuable, Combines stock split and re-purchase. VEP is advantageous to both Shareholders and Company! • The replacement of existing shares of shareholders with new corporations shares on 1:1 ratio • an additional $20 cash as a compensation for reduction in the value of new shares OR option for the shareholders to reinvest the $20 cash to procure additional shares • Advantage is double sided. The company’s dividend pay-out ratio is reduced. • The stockholders would receive the $20 cash taxed at a rate for capital gains and not the marginal tax rate. • Shareholders...
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...Question: FORD MOTOR COMPANY’S VALUE ENHANCEMENT PLAN (VEP) Q1. Vote in Favour or against of Ford Value Enhancement Plan? Vote in favour of ford’s Value enhancement plan for reasons discussed below: 1. Choice to Investor: It clearly gives the choice of investment and possible returns that could be obtained to the investors. They can make the choice for themselves depending future prospect of pay-out that they would prefer. 2. Share Advantage: For example if we take an investor has 100 shares in the company, if he would prefer to receive extra shares instead of a cash pay-out he would now have 174.8 shares in place of the 100 he initially had, an increase of almost 75% of shares owned by him. With the increase in the number of shares an investor owns, even though the share price will fall it gives the investor the advantage of selling a part of their shares for a more profitable investment and still a retain considerable number of the company shares. If the company were to conduct a share repurchase it would take considerable amount of time before all the shares could be bought back as the limit for daily repurchase is set at 25% of their volume. It could take up to almost a year by the time ford can repurchase the shares for $10 billion. So VEP adds value as they provide an option where they can repurchase a lesser percentage of their shares. 3. Pay-out Advantage: For an investor who would prefer to receive cash pay-out in place of receiving more shares, with the VEP he would...
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...PEROLD On April 14, 2000, Ford Motor Co. announced a shareholder Value Enhancement Plan (VEP) to significantly recapitalize the firm’s ownership structure. Ford had accumulated $23 billion in cash reserves, close to the company’s largest ever cash position and significant relative to Ford’s $57 billion equity market capitalization. Under the VEP, Ford would return as much as $10 billion of this cash to shareholders. In exchange for each share currently held, the plan would give stockholders one new share plus the choice of receiving $20 either in cash or additional new Ford common shares. Ford also announced that it would distribute ownership of its Visteon Corp. parts unit to shareholders. Ford’s share price had performed poorly over the previous year (Exhibit 1), and the proposal drew a positive reaction from analysts who had been urging the company for months to distribute cash to stockholders. Some hailed the VEP as the boldest step yet by Ford Chairman William Clay Ford Jr. and Chief Executive Officer Jacques Nasser to convince investors that they were undervaluing the world’s No. 2 automaker. However, the plan raised a number of questions for investors. Why was Ford proposing this transaction instead of a traditional share repurchase or a cash dividend? How did the interests of the Ford family factor into this decision, and what did the transaction imply about the future involvement of the family in the company? Why was Ford distributing such a significant...
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...SUFFOLK UNIVERSITY SCHOOL OF MANAGEMENT Graduate Programs in Finance Fall Quarter, 2011 FIN MF 820 Financial Policy Thursdays: 7:15-9:55 Instructor: Dr. Shahriar Khaksari, CFA Office: S432 Phone: 573-8366 Email: skhaksari@suffolk.edu The New Corporate Finance: Where Theory Meets Practice Mcgraw-Hill Series in Advanced Topics in Finance and Accounting Course Objective This course is designed to allow students to develop a deep understanding of financial theories, techniques, and models applied to the study of corporate financial decisions. It covers aspects of corporate strategy, industry structure, and the functioning of capital markets. The course consists of three segments. In the first segment, students do a comprehensive analysis of the assigned cases and prepare a written report that includes identification of major issues, alternative approaches, analysis of each alternative, and a concluding part in which students take a clear cut position in how they would approach the problem as a decision maker and defending their position. The Case study is done by groups (three to four students per group). The text analysis should not exceed five pages. It should be typed and double-spaced. A lengthy summary of the case is unnecessary and redundant. The space constraint should discipline students to be concise at differentiating major issues from the less important ones. All the tables, graphs and related...
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