http://www.forbes.com/2008/10/27/aut...rtner=yahootix

Detroit
Why Ford Needs The GM-Chrysler Deal Done
Joann Muller, 10.28.08, 6:00 AM ET


Detroit - In the talks between General Motors and Chrysler, no one has more at stake than Ford Motor

The entire U.S. auto industry is teetering, and it wouldn't take much to push Ford (nyse: F - news - people ) over the edge. A bankruptcy filing by GM (nyse: GM - news - people ) would surely do so, since it would give GM an opportunity to toss out costly labor agreements and supplier contracts, leaving Ford at a competitive disadvantage. Ford wouldn't be able to survive very long paying higher costs for labor and parts than GM.

But if GM and Chrysler do merge--potentially with assistance from the federal government--Ford stands to gain the most. Credit Executive Chairman William C. Ford Jr. for that. His decision to dial back Ford's ambitions in recent years left the company in a fundamentally stronger position than either of its Detroit rivals.

That doesn't mean Ford is healthy. The automaker lost $8.6 billion so far this year. Expect poor third-quarter results on Nov. 7. Despite massive cost-cutting, Ford is burning cash at a rate of $1 billion per month. Through September, Ford sales are down 17%, and analysts predict October sales will be even worse.

But under Bill Ford and his successor as chief executive, Alan Mulally, Ford's done a good job lately of getting its house in order, and if it's not dragged down by a GM bankruptcy in the next year or two, Ford will be in good shape to take advantage of an economic rebound when it comes.

One reason: a fairly comfortable cash cushion. As of June 30, Ford had $26.6 billion in cash (probably down to $23 billion in the third quarter). That's because shortly after Mulally's hiring in fall 2006, Ford mortgaged virtually all of its assets to obtain a $23 billion line of credit that would ensure it had adequate liquidity to restructure.

The move was considered risky at the time, but in retrospect, it looks smart. Ford was able to access the credit markets before the door slammed shut for automakers. If GM had taken similar action, it probably wouldn't be seeking capital now by trying to buy Chrysler from private equity firm Cerberus Capital Management (and the $11.7 billion on Chrysler's balance sheet).

Aside from its balance sheet, Ford's relative strength during the current crisis is due mostly to Bill Ford's "back-to-basics" directive earlier this decade and to Mulally's grip on reality during his two years in charge.

After a disastrous expansion under former Chief Executive Jacques Nasser in the late 1990s, Bill Ford wrested control of the company and sold off non-core operations. He forced out the head of Ford Motor Credit (nyse: FCJ - news - people ), too, tightening lending terms five years ago and resisting the temptation to get into the mortgage business that had been so lucrative for GM's former captive finance company, GMAC (nyse: GJM - news - people ).

That conservatism meant Ford Credit probably missed out on the chance to reap its share of the housing boom three or four years ago, but it also avoided the ugly mortgage meltdown that followed.

Now Ford Credit is a key to Ford Motor's survival. Unlike GM, which sold a 51% interest in GMAC to Cerberus in 2006, Ford steadfastly refused to sell its finance company, which it considers a strategic asset.

An automaker's finance arm is more than just a bank that lends money to consumers and dealers, says Andrew Shapiro, managing partner at Casesa Shapiro Group. "At the end of the day, it's a marketing tool" that can be used to help manage inventory, he says.

GM lost that opportunity when it ceded control of GMAC to Cerberus. It paid the price recently when Cerberus--likely seeking to pressure GM into a deal for Chrysler--announced GMAC would no longer provide loans to consumers with credit scores below 700. That choked off sales at GM dealerships, forcing the automaker to spend precious millions on a national advertising campaign to reassure consumers that credit was still available (through other lenders) for GM vehicles.

The moral of this story is don't lose control of your captive finance company. When sales of a certain model turn soft, for instance, Ford can turn to Ford Credit for subsidized incentives to woo buyers and make way for better-selling models.

Though Ford has clung tightly to Ford Credit, it sold weak brands like Jaguar, Land Rover and Aston Martin. It would sell Volvo tomorrow if it could find a buyer, and it is considering selling part of its controlling stake in Mazda (other-otc: MZDAF.PK - news - people ).

Operationally, Ford is getting better, too. Its quality ratings are now among the world's best, and under Mulally's vision of "one Ford" worldwide, it is working hard to combine product development efforts around the world, which will lower costs and boost manufacturing efficiency.

It's all left Ford in better shape than General Motors. And if GM gets a bailout from the federal government, or new concessions from the United Auto Workers union, you can bet Ford will insist on equal treatment. That will only strengthen Ford as it comes out of the current downturn.

The next year or two will be extremely difficult for Ford, but if it can skirt the present danger, its stock (currently at $2 a share) may be worth holding down the road.

 

FWIW, one of my co-workers and I have been talking about buying Ford stock at $2 a share because it appears to be the strongest US automaker and has the biggest potential for upward growth once the economy turns the corner. He actually went ahead a purchased some stock (won't tell me how much) and now he's trying to encourage me to do the same. (Too bad I don't have an extra $10k or so laying around, otherwise I might.)

 

This just goes to show the difference in strategic planning between Ford and GM. Ford's leaders ran their company like owners.

Allowing Cerberus to take majority control in GMAC was a MAJOR strategic blunder on GM's part. Major with a capitol "M". Cerberus is now dictating terms to a weakened GM because of it, and when things turn around, it will be Cerberus which reaps the profits.


As a battered GM shareholder, I'd like to know whom on the BoD supprted this move and what their thinking was - and to see some heads rolling

 

Seems to be a common theme with GM lately, doesn't it? "What were they thinking?" "Heads need to roll."

No matter what big decision GM makes these days, you can bet it will be the wrong one. Current economic conditions are one thing, but GM has an uncanny knack for exacerbating their problems with each new move. The possible Chrysler merger should terrify everyone for this reason alone.

 

Yeah, I simply cannot imagine how GM would manage another 3 brands, when it can't even manage the ones it already has. Other than getting the feds to commit some cash for this merger, I can't see anything good coming out of it.

Hopefully GM is already talking to Renault/Nissan about a "post merger" deal. That's the only way I can see Chrysler's brands surviving. As far as GM goes ... we might want to start by firing the worthless Board of Directors.

 

Does anyone remember the movie "Trading Places"?

 

wouldn't a ford chapter 11 filing make their stock worthless? or do the stockholders retain their shares?

 

You don't understand, its a good idea.

 

My understanding is that the financing side of the business was always more profitable than the car side, so Ford is making the correct choice.

 

Ford would only go BK fighting and kicking and screaming............. and against their will. It would most likely eliminate the families special stock, and that is something that the Ford family will fight, for all they are worth.

Having a company be family owned can be a great asset. It has really shown to be in the last few years, as it has saved Ford from a takeover, and would, most likely (unless GM files), save it from going BK also.

When a business is family owned, there is alot more at stake.

PS, GM would file before Ford, and they won't, as they know the implications of that (most of their business disappearing overnight).

 

Although I feel that giving up controlling interest of GMAC to Cerberus was a bad idea we have to remember that they got far deeper into the mortgage and security deals than Ford Credit. I remember when the deals for GMAC with Cerberus were going on it seemed like at the time giving up the 51% of GMAC was the only option GM had left.

The real moral of the story is don’t let your captive automotive finance company get involved in extremely risky real estate deals.

There is no doubt that FoMoCo had better vision going forward and secured their money and sold almost all non-essential assets while they could still get something for them. But lets not look back on this 20/20 and wonder what GMAC was thinking because they are far from the only ones who got caught up in this financial crisis. At the time those deals had far lower risk and much higher reward. Do I even need to list all the other institutions that swallowed the hook with GMAC.....

 

Great answer. Ford is the most stable US automaker at the moment in terms of investing. They'll never file for Chapter 11 bankruptcy protection.

 

Dont say never. If GM or Chrysler files, Ford would have to soon follow suit, as they would become uncompetetive if they didnt.

 

As I've said for some time (and gotten flack from a few GM diehards over) Ford is easily the automaker in the best position to get through this and GM is in the worse.

I've also said GM has some of the most talented people in the car business by far. GM also has that "scale of economies" that gives them magnificent leverage on costs when dealing with suppliers and just about everyone else. GM has global resources that Toyota can only dream about. GM has perhaps the most advanced and quickest vehicle engineering & development systems in the world.

Yet, despite all of this, all bets are on Ford to be the one standing when the dust settles and GM is all but desperate to not only grab their smallest rivals cash stockpile, they need government money to do it.

Spinning off GMAC was a move I was against back then simply because it didn't make any sense. It was highly profitable, it was clear collateral in the event GM needed to borrow money (ironic: using a lending company as collateral for getting a loan) and as mentioned, you can use your own finance company to kickstart your own sales if needed.

When the dust settles in all this, Ford still has their own finance company, Toyota will have their own finance company, even Honda has their own finance company American Honda Finance. General Motors will be the only major carmaker without their own financial company.

..... unless they gain Chrysler Financial (unlikely)..... which is still currently fully tied to Chrysler.

Somehow, the term "Extreme Ironies" just doesn't quite go far enough in saying it.