A PVGO analysis (Table 2) also shows Ford shares have a further $12.69 per share growth potential. So Ford is wise not to provide a special dividend payout as this will weaken PVGO via an increase in the payout ratio as well as a decrease in long term ROE. But for this potential to be realized Ford will still need to highlight what performance factors can achieve this potential.
External shareholder
Even though Ford was strategically refocusing, had historically strong cash flows, increasing sales and a healthy 4% dividend yield, share price had previously not been meeting shareholder expectations. So from the shareholder viewpoint:
- The Visteon spin off added value by increasing the shareholders personal portfolio diversification and thus decreasing their portfolios’ idiosyncratic risk.
- The share buyback provided shareholders with
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A tax free share swap in both the new Ford and Visteon shares,
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A $20 per-share payout with lower tax ramifications (see example #1)
- A choice to divest from Ford shares, thus reducing the number of new shares outstanding, which over time would improve earning per share creating greater value for the long term investors
Overall, the plan had so many variations aimed at satisfying the needs of many of the investor types (i.e. the passive index investor, the exit strategy investor and the long term shareholder) that the plan should be seen nothing less than value enhancing for shareholders.
Employees:
If Ford shares were not as undervalued as Ford management indicated than more employees, with their greater level of insider information, would have selected the $20/share payout and invested in a higher earning equity. But since the total VEP payout was ~$5 million it is likely that employees saw that Ford was in a position to increase long term value.
The VEP plan would also allow employees to more easily manage the capital gains tax from their stock option plan’s (Table 3). With a smaller spread between the ‘new’ strike and market price ($8.05 compared to the original spread of $14.07) employees would pay less capital gains tax per share thus allowing them to spread individual tax risk across a greater number of sell opportunities. While this scenario might also incentivize employees to sell options thus diluting future EPS and shareholder value it is likely this concept was accounted for when Ford developed the VEP program. So overall the VEP programme is enhancing value for employees.
Ford family:
With the ability to decrease their total equity holding form 5% to 3.6% without losing future dividend payments as well as obtain an increased number of dividend paying common shares, it is apparent that the Ford family would have the most enhanced value from the plans implementation. Not only would it increase their total number of common shares through the plan, they would maintain their critical Class B shares as well as the historically significant 40% voting rights which provided them with the “exclusive right to approve a merger, sale or liquidation of the company”.
Conclusion:
The facts are that this is not a $10 billion free lunch; this is a yield neutral event where the financial benefits provided by the payout are cancelled out by the lower future dividends and share price, so this has no effect on the firm’s book value. But what it does have is an effect on shareholders perception of market value and thus the share’s future potential market value.
In the end VEP was to give marginal investors the option to liquidate at a time when greater value was perceived to be in high tech and dot com businesses. It would become a clearing house for dissatisfied shareholders, while simultaneously ensuring that the Ford family retained voting rights and increased their cash streams.
Since market value is based on market perception, Ford hoped that by satisfying the largest proportion of their shareholders they would be able shift market attention towards the company’s fundamentals and continue to strengthen long term shareholder value.
Assumes that accepted projects would be similar to existing businesses; having the same risk & debt ratio
This recognizes that in 1999 cash flows were lower than historical average due to Volvo purchase.
Comments indicating shareholder dissatisfaction with share price provided by 1998 and 1999 Annual Reports as well as from various websites such as thestreet.com and fidelity.com financial news archives
the holding period will be same as for the original Ford shares thus no change in capital gain tax if shareholders chose to sell (a definite positive aspect)
Information taken from the 2000 Ford Annual Report
pp. 38 of 2000 Annual report
Vlasic, B. Truby, M (2003) How Ford family saved dynasty Bold stock maneuver preserved control. The Detroit News http://www.detnews.com/2003/autosinsider/0306/02/a01-180816.htm /