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,
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• Shareholders choosing to re-invest in stocks can be incentivized by having more voting power and control over the management.
• Since firms incur the re-purchase option by offering $20 cash for each stock bought back, the number of outstanding shares will be reduced. The Earnings per share will increase leading to an increased stock price.
• Benefit out of opportunity Cost for the shareholders to invest the $20 in a different firm
• Ford family benefited by retaining their voting control since they did not have to surrender their Class B shares.
3. What are the alternatives for distributing cash?
• Fixed Price Tender Offers
But shareholders feel that it could have been a simple re-purchase of stock and they were not happy with the common stocks being provided to Ford’s family. They endorsed other options to avoid the dilutive effect of VEP. – Straight Stock re-purchase or Declaration of Dividend.
4. What problems is the VEP plan designed to solve?
• Ford perceives itself as being undervalued by the market in the year 2000
• Analysts urging the company to distribute cash to stockholders.
• Clan Strategy:
• VEP can change market perceptions about growth or cash flows and thus act as signals to financial markets. – Signal Hypothesis!
• Value, flex, liquidity and alignment for stockholders
• Linking managers pay to the price of stock may improve efficiency and thus increase cash flows, growth and value.
• Use its cash for acquisitions!
• Highlight its cash flow reserve capacity
• Re-shuffle ownerships interest in the company
• At the hindsight, Ford anticipated the company to be more risky… so, VEP was one strategy for them to re-purchase their investment from a safeguarding motive.
As a shareholder, how would you approve the VEP?
Approve or Reject Recap?
Depends on forecasting stock prices!
6. Would you elect cash or shares?
Cash! Unless I see multiple incentives for the stock price to shoot up!