In the major deal it has done in a long time, the Ford Motor Company has decided to separate its electric-vehicle company from the traditional automobile division last week. But most importantly, not to spin off the electric-vehicle business to chase the high-priced stock valuations sparked by EV market leader Tesla, Inc. and, occasionally, rapid followers such as Lucid Group and Rivian Automotive companies. Their stock prices have been sagging in recent months.
The company met Wall Street halfway in its restructuring strategy, but it is still essential, and the analysts were generally optimistic about the decision.
Nick Colas- Co-founder- DataTrek. A former Wall Street autos banker saying that the auto companies will need to convince the street that these spinoffs should not complete sooner than later described Ford’s decision as “an intriguing reorganization.”
“Auto firms do not usually change their reporting charts in this way, and such changes are dangerous regarding the productivity. However, it allows more transparency management accountability, and that is always beneficial for the long-term,” he states.
It seems that the message comes from Ford Management is that the electric-vehicle business, despite solid sales of the highly-rated Mustang Mach-E, is not ready for the big time. Ford took the safer route to keep its exciting business tied to the lucrative mother ship for longer.
It allows the electric-vehicle unit to be called Ford Model e. Other technological initiatives can invest up to 50 billion dollars primarily out of the cash flow coming from the present Ford, dubbed Ford Blue.
That cash flow was 40 billion dollars over the past two years. It means Model e will not have to turn to bonds or stocks to finance its expansion.
At the same time, the Ford Motor Company may be able to reverse a portion of the considerable discount its shares trading at compared to EV pure shares. The solution Ford decided to adopt is to maintain its operations closely aligned. Still, they will report their results separately at the start of next year so that Wall Street can begin to examine the EV company’s growth and evaluate it on its own.
“We love the decision and believe it was driven by anger,” CFRA Research analyst Garrett Nelson states. “Ford’s (price-to-earnings ratio) stock trades is in the high single digits, which is a tiny percentage of Tesla’s, even as they were the second-largest selling company of electric vehicles. It will be growing quicker when it comes to the F-150 Lightning pickup ships in just a couple of months.”
Ford executives highlighted both financial and operational benefits that joining the two companies could offer. Farley focused on the combined company’s ability to fund its growth strategy without relying on capital markets. At the same time, aides detailed plans to share costs between the electric and the gasoline-powered vehicle businesses, cut costs in the traditional unit, and get both sides of the company to collaborate to boost profitability faster than they could on their own.
The main goal is to cut as much as 3 billion dollars annually by 2026. The effective plans include Ford’s budget for advertising, which is estimated at $1.8 billion by Statista-(Database Company). For only U.S. spending – and the $4 billion annual cost of warranties, Ford Blue President Kumar Galhotra states that it will announce through the increasing performance of Ford automobiles.
Nelson states that many cost savings will come from outside the United States, citing money-losing enterprises in Europe and parts of Asia.
The Ford Motor Company has met its goal. The new growth is expected to be accelerated by introducing brand new electric vehicles, including the F-150 Lightning. Ford has announced more than 250,000 pre-orders and is working to increase production ahead of shipping in the year. However, it is only offering an electric version of its top-selling pickup truck with a single design compared to the different cabs that provide different levels of luxury that are available in classic gasoline F-150s.
The Ford Motor Company stated that it expects to earn about a third of its auto sales from electric vehicles by 2026 – around two million cars. It sold around 726,000 F-150s across the United States last year.
The EV spinoff discussion will not disappear: – All of this could result in, more advantageously, Ford to complete the rest of the deal and fully spinoff its Ford E unit by about 2024, states Wedbush Analyst Dan Ives. The most important thing is to continue to boost the sales of electric Mustang Mach-E, which has sold over 27,000 vehicles by 2021, which is about half of the amount of gasoline-powered Mustangs. Also, following through on the initial promises that the electrical F-150 and Electric E-Transit commercial vehicle designed for small-scale businesses and adding more versions as the company expands.
“In the next 12-18 months, given the popularity of the F-150, investors will be looking to see them raise capital and double down,” Ives stated. “When they start to report units sales, so you can observe the demand in the electric-vehicle business, we will be able to value it. It is the first step towards the eventual spinoff out of that EV enterprise,” Dan Ives stated.
Emilie R. Feldman, professor of management at The Wharton School, University of Pennsylvania, specializes in divestitures and corporate restructuring. She states that Ford and other auto manufacturers who might follow the same path are not issuing what is most likely to become the ultimate decision regarding corporate structure, which could result in a complete separation.
Market history is full of instances of when the benefit of separation began to surpass that of integration, and the divestitures took place.
“The situations have played out several times in different industries and overtime periods, whether it is companies that have both new and old technology businesses, companies that have established and more nascent companies or businesses that are based on end-products,” Feldman stated. “I think the same could occur for companies such as Ford Motor as well as General Motors in the auto industry, as well as Shell and other firms in the energy sector with green vs. brown energy businesses.”
Other automakers such as Volkswagen and General Motors will be keeping an eye on whether they could take similar steps, the Morgan Stanley analyst Adam Jonas stated. However, Jonas, who does not recommend Ford shares, argued that relying on the cash flow of the existing business is highly valued capital that is investing in the high-risk electric vehicle business.
Ford family, watching over the board’s shoulders and focused on maintaining the Ford’ blue’ icon throughout any eventualities. He also noted that it was the only one whose competitors did not become bankrupt. It also has a long history of more “thoughtful choices about the next step. They want it to last for another 100 years.” Colas said.
When an actual Ford Motor EV company makes more sense:- The financing of EVs at present is dependent on a booming market for vehicles that is booming for truck sales in the United States., and Ford could continue to benefit from these conditions for the next few years in the future, with cash generated by traditional automobiles, allowing Ford to reach all its goals. However, if a recession occurs, “they cannot get anywhere near it,” Colas stated. “Autos are cyclical in their profitability profile, and these cash flows disappear. However, you still have 5 billion dollars a year in investments in electric vehicles that you have to invest.
His perception of the auto industry is based on his experience working as a financial analyst: companies are more likely to take the right decision when facing the wall in terms of finances, especially in the midst of a down economy. “In the other parts of their cycle, they’re cautious. They want to maintain the critical mass,” Colas said.
Ford’s cash flow analysis and its decision demonstrate a potent force that Feldman claims her research about corporate strategies has proven the inertia of the divestitures and spinoffs.
“The mentality is something like the following: ‘We know that eventually, we will need to separate, but the cash flow is too useful for the time being is too complicated to unwind right now, so let’s hang on to the business.’ This logic is probably correct right now for Ford Motor Company,” she stated. “But this kind of thinking does demonstrate the reasons why certain companies may hold on to certain businesses for too long even though divestitures are justifiable.”
Devoted my whole life to words - reading, writing and trying to be original on social media. Got certified in digital marketing - still not cool enough to be an influencer. Finished a master’s degree focused in Literature, Publishing, Mass Media. Hobbies include traveling, reading and hoping that yoga will be the thing to finally teach me some patience. Would like to take over the world at some point, but that’s an optional dream. Maybe modern tech can help me do that?