To tax mavens and deal buffs, the Ford transaction is a classic: a financial Jaguar E-type, as it were. “This is one of the best-thought-out pieces of perfectly legitimate tax planning I’ve ever seen,” says Lehman Brothers tax expert Robert Willens. Some big holders are opposed to the plan, claiming it benefits the Ford family unduly. But it will go through regardless, thanks to the family’s 40 percent voting stake. “I’m really excited,” says chairman William Clay Ford Jr. “It gives every shareholder choice, and it’s tax-efficient.” The plan calls for holders to choose among getting cash, stock or a combination. The Fords are taking their piece–$1.4 billion worth–in stock because they think the shares are cheap, and because that helps Ford Motor get this deal past the Internal Revenue Service.
Unfortunately for Ford’s Wall Street image, some of the Street’s biggest players aren’t as enamored of the deal as Bill Ford is. Ironically, the problem seems to be that the company, which considers itself a master marketer, didn’t sell the deal to its shareholders. Ford–surprise!–disagrees. “It’s a good deal for shareholders, it doesn’t need marketing, it needs to be well explained,” a spokesman said.
Ford has managed to really annoy “corporate governance” types, who worry about shareholder rights and such, by seeming not to even pretend to care about their complaints. Normally, I’d be at the head of the pack attacking con- trolling families’ self-entrenchment–I’ve written tough things about the Marriott family of hotel fame and the Chandler family that used to control Times Mirror–but the complaints in the Ford matter strike me as no big deal. What isn’t trivial, though, is that Ford hasn’t explained things clearly.
Consider the poor individual stockholders, who own about half the company. This month, they got 90 pages filled with small type and legalese, a document that makes even auto-wiring diagrams seem accessible. The company didn’t seem to take marketing to big shareholders seriously, either, until opposition surfaced about 10 days ago. Three big funds say they’ll vote against the deal, and the nation’s biggest vote-adviser has recommended holders vote against the deal at the Aug. 2 meeting called to ratify it. It’s safe for them to vote no–they’ll still get the promised money and stock because the deal is sure to pass, thanks to the Ford family’s 40 percent voting stake. That certainty accounts for Ford’s poor sales job.
Ford’s problem is that even though it’s making money hand over fist, its stock is selling cheap relative to its cash hoard ($25 billion) and its profits. The car biz is notoriously cyclical, and a down cycle seems imminent, which doesn’t help. Wall Street wants Ford to bolster its market value by distributing cash and buying back stock, which this deal does.
Let’s look under the hood and see how this baby works. If you own Ford stock, you have three choices. You can take $20 a share of partly tax-sheltered cash and decrease your proportionate stake in the company; you can mimic the Fords and get $20 a share of new Ford stock tax-free and increase your stake; you can get a stock-cash combo and keep a 99 percent proportionate stake. If you do nothing, you get the cash.
If this model choice isn’t confusing enough, you have to send in your existing Ford stock certificates in return for new ones. In addition to cash or new stock, you’ll get one share of Ford Value (to be renamed Ford Motor) for each current Ford Motor share. For technical reasons that I’ll spare you, it’s impossible to tell how many new shares you’ll get, whether you’ll get the full $20 or get a cash-stock combo instead, or at what price post-deal Ford shares will trade.
Why go through these gyrations? In a word, taxes. Ford could have disbursed $10 billion by giving holders an $8-a-share special dividend. But that would be nuts. Individual stockholders and the Ford family would have to pay Uncle Sam full taxes (up to 39.6 percent) on dividend income. Ford’s contortions turn the cash into capital gains (maximum rate for long-term holders: 20 percent) and make the stock distribution tax-free. Ford could have bought back lots of stock at an above-market price. But the Ford family would have had to sit out the party or risk having its control diluted. Here’s why. The Fords own 70.9 million special shares that have a combined 40 percent voting stake. Selling more than 10.1 million of them–which a big buyback would entail–would lower the family’s voting stake to 30 percent. They consider this unthinkable.
Enter Goldman Sachs, Ford’s financial adviser for decades. Goldman trotted out its financial-stock diagnostic manuals, looked up the fixes for Ford’s problems–a low stock price, lots of cash, large holdings by individuals, the Ford family’s own needs. Using a recapitalization to get favorable tax treatment leaped off the page. In addition, while the family is flush now, getting $1.4 billion of new stock it can sell to pay estate taxes without losing significant voting power never hurts. An example, by the way, of who would really benefit from eliminating that tax.
No one at Ford or Goldman would discuss tax specifics, but Lehman’s Willens says the deal is based on a 1986 IRS revenue ruling. Willens says other companies could use this technique, and probably will.
My favorite part of this deal is the cash-and-stock option that lets you keep a 99 percent proportionate stake. That’s for index investors, who own about a third of the 44 percent of Ford owned by institutions. This way, indexers, who mimic an index rather than picking specific stocks, don’t have to juggle their portfolios very much.
Even though Ford cleverly anticipated index investors’ problems, it was blindsided when the opposition–some of it from indexers–started. Kenneth Bertsch, corporate governance director of TIAA-CREF, the $600 billion money manager who launched the first public attack, is upset because the Fords’ B shares would keep the same 40 percent voting control after the deal, even though Ford will issue so many new shares that the B’s will be only 4.5 percent of the company rather than the current 6 percent. “Mark my words, the disconnect between ownership and control will come back to haunt Ford shareholders in the future,” says Patrick McGurn of Institutional Shareholder Services, which urges a no vote. Ford says that all these critics fail to appreciate the deal. The bottom line: you can argue about the family’s role, but the deal is great financial technology. If Ford can produce vehicles designed this well, it will be rolling in dough for years to come.
