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Job #1 at Ford: Debt Reduction

Ford-dealership.jpgIn the midst of ongoing media attention aimed at the auto industry in general and the Detroit “Big Three” specifically, some positive and important news emerged this week as Ford announced it had reduced its debt load by just under $10 billion dollars. The Detroit automaker said it was spending $2.4 billion in cash, in addition to 468 million shares to improve its balance sheet and distance it from federal aid.
The news is seen as important, because buyers are reluctant to step off the sidelines, even with incentives and greatly reduced pricing. A just-completed AutoPacific online survey showed that buyers are disappointed by automakers taking bailout funds and that Ford tops their choice options in U.S. vehicles, in part due to its ability to avoid an Uncle Sam handout. The same survey respondents indicated they were unlikely to purchase vehicles from either GM or Chrysler.


Ford’s actions were seen as strategically clever and the market responded, with the company’s stock price jumping 16% to $3.77 per share at the close. Ford was able to pull the deal off by offering the shares and cash to debt holders now in lieu of waiting until the company’s debt obligations matured. In addition to the overall improvement to the balance sheet, the Blue Oval now has reduced interest payments by $500 million annually. “Ford is upstaging GM,” said Pete Hastings, a senior analyst at Morgan Keegan. He added that “Ford has offered better terms than are currently being discussed by GM and that would substantiate GM’s bondholder claims that they should be offered a better deal. It may cause the government to re-evaluate its position and put more pressure on the union.”
As Ford’s actions rallied investors in the market, GM and Chrysler continue to struggle. The two Detroit-based competitors have taken $17.4 billion in federal aid so far, and would not say no to additional support, according to most experts watching the auto giants. Both companies continue to negotiate with the UAW and bondholders, seeking concessions that could demonstrate the “action” required for additional assistance as defined by the White House. Chrysler also need to pursue the potential of a marriage to FIAT, the EU manufacturer that has shown in interest in stepping up to the alter.
Of the three companies, the fall of Chrysler may be of the most significance. The company was the most profitable U.S. automaker as recently as the late 1990s and attracted Daimler Benz, resulting in the short-lived DaimlerChrysler “merger of equals.” The company’s history includes Lee Iacocca and Hal Sperlich, the “father” of the minivan. But, the Daimler marriage soon had the same executives that created the Chrysler black ink running for the exits, and customers soon followed. In fact, current CEO Bob Nardelli blamed the Daimler relationship for the company’s ills, saying it had been “hollowed out.” Of course, Nardelli failed to mention how the decline had accelerated into the fast lane once the CEO title was attached to his business card.
And, now, once again, Chrysler needs a grownup to help it not only survive, but return to a position of respect, admiration, and innovation. And despite Ford’s actions this week to be strategically innovative, the market still needs to jump in, as the bottom line for every automaker is the same: They’re in the business of selling cars and trucks.

2 Comments

  • dbarrett| April 9, 2009 at 12:37 pm Reply

    Joe –
    You’re on the money, so to speak. Getting foreign models to the U.S. has long be a desire of not only Ford, but other U.S. automakers as well. The Pontiac G8 is an example of a car that has a shared platform with a “world car,” and Ford is full steam ahead with its plans to get the Fiesta into the United States. See the VehicleVoice story from March about our test ride in the new Fiesta. It’s more of a Siesta if you’re a sporting enthusiast, but it gets the job done and is economical, so Ford may have some success. Keep those opinions coming – and thanks for sharing.
    – David

  • Joe| April 9, 2009 at 11:51 am Reply

    I applaud Ford in it’s actions to reduce debt and remain a viable corporation. I have long been a proponent of Ford and current Ford owner. I have owned vehicle from all 3 US automakers and a couple Japanese and it is the Ford’s which always come into mind when I think quality. My only current problem with Ford is the models which they build outside the US. The plants in Europe, Brazil and Mexico have had huge influxes of cash for modernization saving huge amounts of money on labor and supplies. They then tout quality when the same investment could have been made into the US plants. But then they import back to US soil and sell at prices like they were built here supporting the US cost structure. If it wasn’t for that, I’d have Fusion in my driveway right now instead of a Focus and 12 year old Jeep.

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