Ford Motor Company’s Value Enhancement Plan (A)
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 amount of cash at this particular point in time? Did the distribution signal a change in the company’s appetite for making acquisitions or future capital expenditures? If shareholders collectively elected to receive less than $10 billion in cash, how would Ford distribute the remaining cash?
1. Does Ford have too much cash? Why or why not?
2. How does the VEP work? Explain all elements and steps of the Plan.
3. What are the alternatives for distributing cash?
4. What problem is the VEP plan designed to solve? Does it seem to be an effective or weak solution to you? Explain why.
5. As a shareholder, how would you approve the VEP? Why or why not? Would you elect cash or shares?