1.

Why was Ford proposing this transaction instead of a traditional share

repurchase or cash dividend?

Ans: Fords stock prices were highly undervalued at that point in time. They
believed such a program would help increase its value. There was also the belief
that this deal would reward the share holders faster than a traditional deal would
have.

This model would also ensure that the family members did not have to lose their
voting 40% voting rights. At the same time the shareholders would not have to
compromise in dividends receipt.

This model also resulted in significant tax reduction when compared to the
traditional share repurchase or cash dividend.

Reduced Dividend payment: Since only those shareholders interested in liquidity

would avail the option to receive cash, the company would have to part with only
a small portion of their reserves. This would keep their options to invest in good
projects intact.

2. How did the interests of the Ford family factor into this decision, and what did
the transaction imply about the future involvement of family in the company?

Ans: The family members wanted to receive cash every now and then either by
receiving dividends or by liquidating their share as they had done on many
occasion in the past. The percentage of the total shares held by the family
members had come down significantly over the years but they had managed to
keep their 40% voting rights.

Had the company gone for a traditional share repurchase, the family members
would have run a risk of losing their voting right if they had participated in the
repurchase. Instead the method allowed the family members to gain some
common shares along with their Class B stock. The family members could now
liquidate the shares whenever they required without losing their voting rights.

3. Why was Ford distributing such a significant amount of cash at this particular
point of time?

Ans: Ford believed that their shares were currently highly devalued. They
believed the main reason behind this was that they had not distributed enough
dividends to shareholders in the past. This was not because they did not have
enough cash. In fact they had accumulated huge cash reserves amounting to $
23 Billion over the years. This was much higher than the reserves being
maintained by Daimler and GM. Hence Ford believed that distributing huge
amount of cash would make a powerful statement about the strength of Fords
new business model.
4. Did the distribution signal a change in the companys appetite for making
acquisitions or future capital expenditures?

Ans: Ford in any case expected a maximum of 40% of the shareholders to opt
the cash option. In the event that cash options were oversubscribed, the $20 per
share would be distributed pro rata to ensure the company distributed a
maximum of $ 10 Billion. This showed Ford had planned only to distribute a
maximum of $10 Billion. They still had cash reserves in excess of $13 Billion
which they could use for any investment they deemed profitable.

Given the already significant consolidation in the global auto industry, the list of
remaining acquisitions candidates had grown shorter. The company in a press
conference insisted that they retained the flexibility to make more deals in the
future. True to their word they did make a winning bid of $6.9 Billion to acquire
Daewoo Motor Company.

5. If the shareholders collectively elect to receive less than $10 billion in cash,
how would ford distribute the remaining cash?

6. Why was Ford building huge cash reserves? What were competitors doing?

7. Should shareholders go for VEP or boycott?