Crisis Tests Ford Family's Hold On Company

[TMN]

Federal aid package could jeopardize heir's control of storied automaker
Bryce G. Hoffman / The Detroit News

DEARBORN -- When Bill Ford Jr. walked onto the factory floor at the Rouge plant last month to inaugurate production of the new Ford F-150 pickup, every worker in the building stood up and cheered -- a testament to the power the Ford family still has over the company that bears its name.

But there are new threats to that power today.

As Congress weighs a historic bailout of the U.S. automobile industry, some on Capitol Hill have suggested that bankruptcy is a better option. Detroit's Big Three automakers have bristled at those suggestions and repeatedly insisted that bankruptcy is not an option they would willingly consider.

But Ford Motor Co. has even more reason than the rest to resist. A Chapter 11 filing would put the Ford family on par with other shareholders, stripping its Class B shares of the super-voting power that gives the family control of the company.

Even if Congress approves a bailout, the proposed legislation would require companies that take federal dollars to forgo using the money to pay dividends to investors. Ford Motor Co. suspended its dividend payments two years ago, but restoring them is a priority for many members of the Ford family who had come to rely on dividends for income. That may be why Ford has suggested that it would hold off on taking any federal aid until the automaker really needs it.

"We were asking essentially for a line of credit to draw upon if needed," Executive Chairman Bill Ford Jr. told National Public Radio on Tuesday. "We hope that we never need to use it."

The family's control of Ford has long been the subject of controversy among shareholders. Now, tensions are said to be rising within the family as the company's stock -- and the personal fortunes that depend on it -- dwindles to its lowest value in decades.

Ford is in a stronger financial position than General Motors Corp. and Chrysler LLC, but just barely. And while CEO Alan Mulally says his company does not need a federal bailout to survive, Ford is joining its Detroit rivals in asking for financial assistance from Washington.

Ford executives have said publicly that bankruptcy is not an option. The company has enough cash to stay out of bankruptcy court at least until 2010, when the full benefits of its new contract with the United Auto Workers kick in -- though a GM bankruptcy could force Ford to follow suit.

But the numbers have never been bleaker for the Ford family. It now controls the Dearborn automaker through its ownership of less than $118 million in stock. Few want to pick a public fight with the Fords, but many Wall Street analysts say this makes their continuing control of the Dearborn automaker hard to justify because it is such a small percentage of the company's total value of nearly $4 billion.

"It's a stretch," said one analyst, who did not wish to be identified. "It's going to get hard and harder to justify."

Family control controversial

The family's continuing control of Ford is challenged by shareholders every year at the company's annual meeting, where resolutions requiring the family to cede control have enjoyed the backing of major institutional investors such as the state of California's pension fund. Yet, none of these resolutions ever have garnered anywhere near enough votes to strip the family's shares of their super-voting status -- and it is unlikely they ever will as long as the family continues to wield the power of those shares.

Because Ford has issued more stock in recent months to raise additional cash, the family's shares represent just 2.97 percent of the company, but wield 40 percent of the voting power. None of these shares has ever been sold outside the family. If one ever was, it would convert to a regular share and lose its super-voting power.

It is a structure put in place to ensure that Henry Ford's heirs would be able to counter any challenge to their ownership of the company he founded 105 years ago. So far, it has worked.

The Ford family remains one of the world's last great industrial dynasties. But its continuing control is also an anachronism in an era when most multinationals are controlled by outside investors.

"The problem is, the world has changed," said bankruptcy expert Van Conway of Conway MacKenzie & Dunleavy in Birmingham. "Different times call for different decisions."

The Ford family has every legal right to continue its control of the company, he said. While some stockholders may object, Conway said they knew -- or should have known -- how Ford's ownership was structured when they bought their shares.

However, he said a government bailout could change the rules of the game.

"There may be issues of control tied to that capital," Conway said. "Control matters to the government, though I don't think it matters out of the chute. Ford might pass because of that, but they have got to be very careful about doing that. Board members have fiduciary obligations not only to shareholders, they have fiduciary obligations to creditors."

Ford's board of directors has been unwilling to consider any option that would require the Ford family to yield -- including alliances with other automakers.
Alliances blocked

Five years ago, GM executives Bob Lutz and John Devine approached Ford about a possible tie-up. Two meetings were held, but the discussions fell apart over a number of issues. One of them was the unwillingness of the Ford family to cede control.

GM CEO Rick Wagoner reached out to Mulally earlier this year with a similar offer, but Ford rejected it out of hand.

Shortly after Mulally was hired in late 2006, he made a pilgrimage to Toyota Motor Corp.'s headquarters in Japan to explore opportunities for collaboration. Bill Ford nixed that idea when he learned of it, reportedly telling associates that he would rather pour gasoline on Ford and burn it down.

Carlos Ghosn, CEO of both Renault SA and Nissan Motor Co., was also interested in an alliance with Ford, but only if the Ford family was willing to give up its super-voting shares.

Earlier this year, billionaire investor Kirk Kerkorian offered Ford $3 billion in additional capital to help fund Mulally's turnaround plan. Ford balked at the offer, in part because the Las Vegas casino mogul wanted the family to relinquish at least some control in exchange for the money so Ford could pursue negotiations with the Renault-Nissan alliance.

Mulally defended the family's continuing control of the company in a recent interview with The Detroit News, saying they bring "a consistency of purpose and long-term view" that is needed in these turbulent times.

"It's not about the short-term or making numbers in the near term," he said. "They're here for the long term. They can go through the tough spots and create even a more exciting and viable company."

Not everyone in the family has been so adamant about maintaining that control. After Ford suspended dividend payments in September 2006 that had been worth $130 million annually to family members, one faction wanted to hire strategic advisers Perella Weinberg in New York to explore other options.

At a family meeting in April 2007, Bill Ford argued against hiring the outside advisers and persuaded his relatives to give Mulally a chance to turn things around. But some of the same issues that led to that challenge are resurfacing as Ford's share price continues to fall.

Ford insiders doubt any of this will become an issue in Washington unless the United Auto Workers makes it one. If Bill Ford's reception at the Rouge is any indication, that is not likely to happen anytime soon.
UAW sees family as ally

UAW Vice President Bob King told employees at the factory that the Ford family is one of the best friends the union has.

"I hope everybody to the core of their being really appreciates Bill Ford and the Ford family, because as many other manufacturers were running away from existing facilities -- running away from legacy employees, running away from urban areas, going to the South and in many cases going overseas -- Bill Ford and the Ford leadership team under his leadership decided to keep jobs in Dearborn, Mich.," he said.

The response: Another standing ovation for Henry Ford's heir.