A Ford Motor Buyout: Built Ford Tough

Ford Motor Co. has become the latest American corporate icon to be batted around as a possible taking-private target. But like General Motors and Microsoft before it, Ford is unlikely to receive serious private equity attention.

Ford has been added to the “will it or won’t it” pundit pantheon because it fits many criteria of a traditional leveraged buyout. It is a longstanding industrial company in acknowledged need of financial salvation, with a stock price that has not traded above $9 per share yet in 2006. Its founding family holds a 40% ownership stake, and the $15.4 billion market cap is easily manageable for the burgeoning number of LBO firms with fund sizes in excess of $10 billion. Finally, it presents the type of challenge that certain firms might find irresistible.

“There are certain brands that might cloud an investor’s objectivity,” says an East Coast investor who preferred to remain anonymous. “Imagine if you were the one to save Ford.”

The temptation, however, might not be enough to overwhelm the myriad of problems with a possible Ford buyout.

First, who would be the buyer? One Equity Partners is among those to have expressed interest in Aston Martin (which is officially on the block), but it is unlikely that it would be involved in a company-wide acquisition. Not only does it not have enough capital to be a major participant, it is unlikely that either the Ford family or board would allow OEP partner—and fired Ford CEO—Jacques Nasser to regain control of the company.

Clayton, Dublier & Rice certainly has strong ties to Ford based on its lengthy negotiations to spin out Hertz, but it never indicated interest in anything larger. The Carlyle Group, Kohlberg Kravis Roberts & Co., The Blackstone Group and Apollo Management all could be players just based on their size and sector expertise, but none seem to be making serious inquiries.

One logical buyer would be turnaround legend Wilbur Ross, whose last salvage job was the union-laden U.S. steel industry. Ross, however, tells Buyouts that he’s not interested. His firm, which recently sold a majority ownership stake to Amvescap, has made several automotive acquisitions like Collins & Aikman Europe, but would rather be a supplier to the OEMs than an actual OEM itself.

Moreover, Ross argues that possible Ford buyers face two distinct dangers. First, there are legitimate questions as to whether or not the company can handle any extra debt. Ford is currently carrying $153.48 billion, which dwarves Toyota’s $91.63 billion or GM’s $45.38 billion.

Second, prospective buyers don’t know what type of union contracts they would be managing. The United Auto Workers contract comes up for renewal next year, and UAW is likely to follow its past tact of “pattern negotiating.” What this means is that it reaches a deal with one OEM, after which it demands near-identical terms with other OEMs.

LBO firms purchasing Ford in 2006 would be unable to predict many labor costs ahead of time, while those buying in after a deal is reached might be forced to pay an inflated price. In addition, the Delphi situation remains unresolved.

As if that weren’t enough, it is unclear as to how workers would react to a buyout. Many are unfamiliar with the concept, and might be unable to reconcile $10 or $12 in cash for shares that were each purchased for over $20 per share.

In addition to Ross’ concerns, there is the matter of the Ford family itself. LBO firms often like founding families because they hold large ownership positions and are easier to deal with than endlessly splintered shareholder pools. They also often are considered corporate assets from either a managerial or technical standpoint.

The current Ford family, on the other hand, has brought little to Ford than their forefather’s name. Bill Ford Jr. admitted last week that he was overmatched as CEO, after which he resigned and hired former Boeing executive Alan Mulally. But Ford Jr. will stick around as chairman, and remains wishy-washy as to the idea of selling out.

In a BusinessWeek interview, Ford Jr. said that his family will “not stand in the way” of recovery, but also said that the issue of diminished ownership “has never been raised,” adding, “I’m not sure what it would accomplish.”