Ford Value Enhancement

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Ford Value Enhancement Plan (VEP)

In April 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 and under the VEP 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 in either cash or additional new Ford common shares. Shareholders electing to receive cash would be taxed on these distributions at capital gain rates. Among other things, the plan provided a means for the Ford family to obtain liquidity without having to dilute their 40% voting interest (even though they own only 5% of the shares outstanding).

Background of Case:

* Ford Company was founded by Henry Ford and 11 Investor in 1903.

* By 1906 Henry Ford had acquired a majority position in the company’s stock.

* In 1956, Ford sold shares to the public. Until then Ford family and Ford Foundation (formed in 1936) had been the company’s sole stockholders.

* The Ford Foundation pressured the company to create a public market for Ford common shares so that it could sell its Ford Shares and reduce its reliance on income received in the form of Ford dividends. Class A shares sold by the Ford Foundation became voting common shares.

* Ford modified its ownership structure of multiple share classes in order to preserve family control. Class B shares had special voting rights and could be owned only by Ford family members. As long as they owned a minimum number of class B shares, the ford family would retain 40% of the voting power. When class B shares were sold outside the Ford Family, they reverted to common stock.

* The Ford Family strongly preferred receiving dividends despite the fact that dividends were tax inefficient for many shareholders. Cash Dividends provided family...