Posted at 12.01.2018
Ford's Value Development Plan is designed to align the passions of various shareholders by offering them different alternatives - the decision of $20 in cash, additional new common stocks or a mixture of cash and new talk about. Based on the next analysis, Ford should go forward with Value Improvement Plan.
The Value Augmentation Plan has the feature of stock divide and share repurchase. Exchanging existing shares for new shares on a one-for-one basis, shareholders are also offered the option to reinvest $20 to receive additional new Ford common stocks. In this sense, show price would lower while the amount of shares outstanding is going to increase. Regarding to Ford's announcement brought up in the event, shareholders choosing the show option would receive 0. 748 new Ford common stocks in lieu of $20 cash. So, the result is comparable to 1. 748 for 1 stock break up. However, not absolutely all the shareholders prefer share option. For individuals who elect cash option, they would receive $20 as though they sell part of the shares, which shows the feature of show repurchase.
With the merged feature of stock split and share repurchase, VEP has its power.
In conditions of cash option, since there is no good things to do with the significant cash reserve, going back the high cash allows shareholders to make profitable investment independently. Unlike cash dividend, went back cash is taxed as capital profits, so it produces duty efficiency for shareholders. In addition, though the price of new Ford shares would reduce, shareholders will not bear any damage, because the reduced price is offset by the money they obtain. But from the company's point of view, they can reduce dividend repayment. Companies have a tendency to keep dividend payout proportion constant, so dividend for each and every new Ford show will lower because share price falls. For individuals who choose to get $20 in cash, they keep the same amount of shares before VEP is unveiled, therefore, the total dividend payment will reduce also to some extent, the pressure for increasing dividend level can be relieved a little. Moreover, the result of cash option is similar to that of show buyback, the amount of new shares spectacular will certainly reduce; thus, profits per share will increase and it can improve the overall demand for Ford's talk about, which will advantage share price in the long run.
If shareholders choose stock option, they can increase voting electric power and exercise more control over the business. Also, as we discussed in the money option, talk about price will increase, so, shareholders will advantage a lot from retaining more new Ford stocks.
As for the combo of cash and new shares, shareholders can take part of the money from the stock to make other profitable investment, and they can also maintain their interest in the business. On the main one side, they can enjoy tax efficiency by paying taxes of capital increases for cash received, on the other palm, they can enjoy the profit when show price increases and they can have a say in the firm.
VEP is better than cash dividend in terms of tax result, and weighed against share repurchase, it matches shareholders' need to stay or increase control of the company. Therefore, based on the analysis, Ford is going ahead with VEP.
Ford relative will choose stock option because they want to broaden their control in the company. By promoting VEP, their 40% voting electric power remains unchanged but their collateral in the company reduces from 5% to 3. 6%. If indeed they elect stock option, they maintain more common shares, and their voting electricity is beyond 40%.
Institutional shareholders, such as TIAA-Cref and the Calpers would choose blend of cash and shares. It's evident that VEP favors Ford family and dilutes institutional shareholders' voting electric power, so it is hard to allow them to contend with Ford family in terms of control even if indeed they reinvest all the $20 cash to buy new Common shares. On this sense, combo of cash and new show is a better choice for the kids. They are able to get part of the investment out of Ford stock for good opportunities someplace else; in the meantime, they can continue to be desire for Ford.
A regular outsider shareholder doesn't care about voting power. The goal of their investment is earnings. So, if I was one of these, I'd go for cash option, because I'd think Ford can't find profitable tasks and there are few development opportunities. By getting cash back, I could make good use of it without any help.