Tuesday, December 30, 2008

Is Ford next?

We have this romantic vision of corporate raiders -- people who swoop into a company, hope to add value to it, then sell it back on the market for a hefty profit. In reality, they can be brutually ruthless; demanding huge concessions from employees and the banks and showing little regard for individual investors. And so we have what came down yesterday on the markets.

Ford may not be in as much trouble as its US competitors, but it's not exactly out of the woods either. Unlike GM and Chrysler which have gotten loans from the government, Ford has asked for a line of credit "just in case."

Now, corporate raider Kirk Kerkorian had made things just a bit more complicated, and has taken a huge loss in dumping the 133 million plus shares he holds in Ford. He had bought the shares at an average of $7.10 and has dropped them at around $2.40.

Not that he's going to hurt that much -- he's a multi-billionaire and can write off his capital losses against any capital gains in other companies so he really loses nothing. So what's the problem? When that many shares suddenly float back on the market, it results in a major dilution of the stock price and it makes the ordinary stockholder who's already lost value hurt even more. In this case, the price dropped five percent in one day.

Often times there is a direct link between the stock price and the company's ability to finance its debt. If a company is worth only so much on paper but it owes many times more in instruments -- well, the company winds upside down. If the company has to refinance, usually the stockholders are the last to get what's left making the shares worthless or only a fraction of what they were. If the company is successful, stockholders often see a reverse split -- that is fewer shares are outstanding.

Remember Air Canada -- when it had to reorganize a few years ago, there was a stock consolidation, or "reverse split," of almost 14,000 to 1. The company of course survives, for now, but too many people got left out in the cold, employees as well as shareholders. Those who had a few hundred shares or less were just given a check for dollars -- if that -- and said, we don't want you around anymore.

Kerkorian, who's variously held stakes with GM and Chrysler in the past in the hopes of taking them over before he pulled out, ran into a firewall at Ford where the Ford family owns a tiny fraction of the shares but preferred voting rights effectively giving them 40% of the company. They weren't about to sell the store to a Johnny come lately any more than they were going to turn the keys over to Lee Iacocca thirty years ago.

But the storm is coming to Ford, too, and there may wind up being another raider who demands even tougher conditions to refinance -- at which point they'll wish they had talked deal with the last guy. And the layoffs, even more massive than what the "angel" would have asked for.

As far as the Japanese auto makers, they are not doing that much better. They may have more prudent business models and a more compact dealer network (making life easier) but when even Toyota announces a loss as they did last week, the first since World War II, the thought they might be passing the plate soon too is very frightening.

You thought our corporate raiders were bad? Wait until a sovereign wealth fund takes over one of the Japanese companies -- especially if the SWF is a crony for the Beijing government or a sheik who openly supports Osama Bin Laden.

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