Ford Case

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Shanghai Jiao Tong University
Antai College of Economics and Management

Corporate Finance Homework

Whoever Pocketed Value From VEP?

Team: Dong Nan 1081209045
Gu Chengzong 1081209020
Li Hongke  1081209050
Lu Linlin 1081209031
Lu Yao 1081209043

March 2009
Abstract
Excessive cash and undervalued stock price forced Ford to conceive an unprecedented cash payout system - Value Enhancement Plan in 2000. For a dual-stock-structure company, this recapitalization did favor much Ford family which held the dominant voting power by giving it larger flexibility, enhanced control with less capital as well as tax benefit and confidence improvement. While the common shareholders may benefit less compared to other alternatives, as like a stock repurchasing plan, given their preferences and different interest to the family.

On the other hand, it is not yet sure whether this VEP could really enhance Ford’s value by enhancing public confidence towards company’s future growth, as it already decreases company’s fundamental value due to tax payment. Moreover, from a long run perspective, a highly cyclical company as Ford should have been more prudent in taking strategies. Large cash payout strategy will weaken its immunity to future economical downturn.

Keywords: Value Enhancement Plan, dual-stock-structure, voting power, public confidence enhancement, stock buyback, cash dividend payout.

Main Points Overview
* Problems identification: excessive cash and undervalue stock. * Supported by comparison with GM and DaimlerChrysler
* Research on VEP and alternative cash payout methods:
* From ford family’s point of view, VEP is the best in the way of more flexibility, higher voting power, higher percentage share holding, lower taxes, most positive signaling to the market and so on. * From common shareholders view, we believe people with different preference ranks these methods differently. * Research on different aspect of VEP, since it is the most possible real cash pay out plan: * Share holder’s choices: Shareholders choose according to their preference as well as the most prevailing factors brought by different methods. * Cash need: Sensitive analysis show breakeven points for the 10 billion ceiling of cash can be used * Spin-out plan: Do enhance company value in the short term by more net income, though noncash accounts, and may in crease cash flow in the long run * Value enhancement: Decrease company fundamental value immediately as cash is taxed, but PE depends on people’s confidence. So whether the plan increased company value is not sure yet * Our comment on the plan and our believe of how to use the cash * Cyclical companies as Ford should keep exceeded cash in industry peak and used them in the future downturn

Content
1. Background
In this case, two problems are identified in Ford Motor, i.e. excessive cash and undervalued stock. We’ll demonstrate some arguments underlying each problem to give you a more comprehensive background at that very point of time. * Too Much Cash?

From this case, we know that the Ford Company would like to distribute $10 billion to share holders. The biggest reason was that the company thought it had too much cash ($23 billion in its account), and the board couldn’t find a good way to deal with this cash. The table below illustrate whether the company had too much cash. Figure 1: Financial Summaries in 1999

Selected balance sheet items| Ford company| GM company| DaimlerChrysler| Cash and marketable securities| 25,173| 12,140| 9,163|
total long term debt| 78,059| 129,697| 64,940|
Total revenue| 162,558| 176,558| 151,035|
total assets| 276,229| 274,730| 175,889|
cash/debt| 32.2%| 9.4%| 14.1%|
cash/revenue| 15.5%| 6.9%| 6.1%|
cash/assets| 9.1%| 4.4%| 5.2%|
According to the data from the balance sheet of the three auto companies, we can get three cash...
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