Corporate Finance

Ford’s Drive for Credibility

Under the leadership of CFO John Devine, the second-largest company in America has become the most believable.
Russ BanhamDecember 1, 1998

When Ford Motor Co. announced a major executive reorganization this past October, which included the early retirement of seven vice presidents, few were surprised that CFO John Devine was retained by incoming CEO Jac Nasser, or that his role was expanded. Devine, after all, is widely credited with turning around the Dearborn, Michigan, automaker’s investor relations department over the past five years and restoring the auto giant’s credibility with Wall Street.

“It’s no wonder Devine has been given an expanded role managing Visteon [Automotive Systems, Ford’s auto-parts subsidiary] and [The] Hertz [Corp.], two subsidiaries many analysts expect it to spin off in the near term,” says Maryann Keller, an automotive analyst with ING Baring Furman Selz LLC, a New York investment bank. In the past few years, she explains, Devine has done “a remarkable job managing Ford’s assets–determining what were the core assets to retain and the ones to be spun off–[moves] that have really maximized shareholder value.”

Just as remarkable is the job Devine has done communicating just what shareholder value means at the $120 billion (in sales) company. Says David Bradley, automotive analyst with J.P. Morgan Securities Inc. in New York, “[Devine] is a fanatic on the subject. Most CFOs in the auto industry will acknowledge conceptually that they are working for shareholders. John has made this corporate practice. Everything he does is driven by the best interests of shareholders, and he has made sure everyone at Ford follows his lead.”

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Such praise from analysts is a far cry from Ford’s relations with Wall Street before Devine’s appointment. “In the 1980s, investor relations shriveled up,” says Keller. Ford was stalled, with bloated product development costs, several noncore assets that pressured the bottom line, and a mode of communicating that echoed the arrogance of its founder, Henry Ford. In fact, says one buy-side analyst, “I don’t think Ford even knew what investors were five years ago. They were down and out as a company and as a stock, and Devine was picked to fix the mess.”

Lifting the Hood

Not surprisingly, Ford’s warmer relations with Wall Street began with new leadership at the top and a new strategy. In 1995, two years after he took the wheel, CEO Alex Trotman unveiled Ford 2000, an ambitious plan to improve quality, create an affordable business structure, and ultimately become the world’s number-one car company. At its core was the merger of Ford’s North American and European product development, manufacturing, and sales groups into one global entity. And what set it apart from past corporate tune-ups was Trotman’s determination to make it visible to shareholders.

To accomplish that goal, Trotman brought in Devine, who had previously served as the chairman of First Nationwide Bank, a Ford subsidiary sold in 1994. “We knew the proj-ect would be a tough haul, but we determined to make our progress, or lack of progress, completely transparent,” says the 53-year-old Devine. “In this day and age,” he explains, “investors want to be able to understand companies, believe in them, and trust them. The more I can tell them about where we’re headed and then deliver on that, the more confidence they will have investing in this company.”

To convince Wall Street of the sincerity of its new approach, Ford began benchmarking world-class companies, including The Coca-Cola Co., to determine how they interacted with the investment community. “In the past eight years, Roberto Goizueta [the late chairman of Coca-Cola and a Ford board director] created more shareholder value for Coke than [anyone else has for any other company],” says Mel Stephens, director of Ford’s business communications and investor-relations department. “Obviously, we listened very closely to his experience.”

In addition, Devine polled analysts about their attitudes toward Ford. “He called me and asked me what was wrong,” Keller recalls. “I told him they weren’t doing their shareholders much good by not having a more proactive investor relations activity. I [talked about] the company’s reticence about discussing things like the earnings impact of ongoing results and, consequently, the difficulties we had building reliable earnings models.” Analyst Bradley objected to Ford executives’ habit of speaking as if from rehearsed scripts when talking to analysts. “We used to go throughout the company and interview scads of people, and they all said the same thing. It was disheartening.”

In response, Devine made the reengineering of investor relations a priority. Internally, he upgraded Stephens from the head of investor relations to the director level. And the CFO worked closely with Ford’s public affairs vice president, David Scott, to merge all of Ford’s business, news, financial, and sales reporting functions into one department under their joint leadership, with a satellite office in New York.

“The idea was to bring all the company’s business and financial information together in the right context for investors,” Stephens recalls. “We weren’t looking to promote sales results on Tuesday and profits on Wednesday. We wanted to show how business news, financial information, sales results, and profits fit into the company’s overall strategy.”

Such synergy only made sense, says Devine. “In reengineering our auto business, we put things on common platforms, looked for efficiencies, and eliminated redundancies,” he says. “In the same way, we wanted our communications to be seamless and integrated.”

Focus on Education

Externally, Devine focused on educating the analysts. At the outset of Ford 2000, for example, he established what he calls Deep Dives to strengthen the understanding of analysts, the media, and other constituents about the company’s drive to become number one (Ford is currently second to General Motors Corp. in worldwide sales). “Our intention was to bring in key groups and carefully outline our strategy with credibility, facts, and figures,” says Stephens. Included in the effort were programs that took investors to Dearborn to meet managers, see new car designs, and test drive the vehicles.

Devine also began coordinating the communication of financial results. Supported by a panel of sales, marketing, economic, and financial experts, Devine now hosts a quarterly conference call for analysts, followed by a press briefing that is broadcast live on Ford’s internal communications network. And he goes the extra mile by preparing analysts before the conference calls. “He faxes over a group of charts and graphs that display performance by business sector, along with a bit of narrative,” Keller says, noting that the advance information helps her prepare more-informed questions.

“What we’re doing with investors is trying to paint a picture of clarity and credibility,” Stephens says. “Anyone can hype their stock and say it’s great. But by doing that, you don’t create fundamental or lasting value. We want to create a truly open channel of communication with investors. When we say we’ll do something, we deliver. As we make these assurances time and again with analysts and come through, it builds our credibility. The result: a higher value for our stock.”

Damage Control

The test of any company’s openness, of course, comes with adversity. And when the Ford 2000 project hit roadblocks in Brazil and Europe following major losses in 1996 and 1997, Devine didn’t hide. “I got in front of the bad news and took the analysts through it,” the CFO recalls. “It was painful to tell them, in particular, [the news] about Brazil [losses of $642 million in 1996]. They didn’t like the message, but they liked the candor. In this game, you have to come clean about the good and the bad to be given credibility.”

The problem in both regions was competition, Stephens says. In South America, for example, “we had a joint venture with Volkswagen for 10 years, and we dissolved it to go it alone,” he notes. “Unfortunately, this was much more difficult than we thought.” In addition, says Keller, “the Ford 2000 project had [filtered out] too many local finance people. It was just too centralized, and the company felt the brunt of investor and shareholder hostility.”

In response, Trotman installed new leadership in both regions. Then early last year, in Brazil, the company ended its joint venture with Volkswagen, Auto Latina; revitalized its dealership network; and enhanced the diversity of cars it sold in the country. In Europe, it announced plans to replace low-profit-margin products with higher-profit-margin products, phasing out production of its Escort automobile while doubling the production of the high-end Jaguar. The changes are paying off: In 1997, Ford’s European operations reported a net income of $273 million, while its South American enterprises chalked up a modest $40 million.

“John’s role was to communicate frankly about these setbacks and our reaction,” Trotman says. “He couldn’t say, ‘Buy our stock and trust me,’ without being completely honest. He came clean on the stumbles and what our problems were. And he clarified what our plans were and how we were executing them. He’s Mr. Credibility for Ford’s plan.”

Baring the soul worked. “He told us he had some bad news to deliver and we would not like it,” says Stephen Girsky, a managing director at Morgan Stanley Dean Witter in New York. “In doing so, he developed a rare, high level of trust in the investment community.” Adds Bradley, “The openness and candor were an amazing turnabout.”

Fixing the Engine

Of course, candor and consistency don’t translate into improved shareholder value on their own. As CFO, Devine also needed to overhaul Ford’s fiscal engine. “He needed to free up asset values by shedding some noncore subsidiaries,” Bradley notes.

Tinkering began in earnest with the sale of First Nationwide, the San Francisco­based savings-and-loan association Devine once headed. “I was sent there in 1988 because it was felt that First Nationwide was a hot property,” Devine says. “Three months later, I found out it wasn’t. So in 1994, when I became CFO, I knew this was one of the first companies I needed to unload.” The company was sold to First Madison Bank that year.

Others followed. Ford’s USL Capital, a leasing company, was sold in pieces, and its heavy- truck business was sold to Freightliner Corp. for an undisclosed amount. Two initial public offerings–the spin-off of Associates First Capital and 20 percent of Hertz, the world’s largest rental-car company, both to shareholders–earned kudos from Wall Street. “It’s been a huge windfall for Ford’s shareholders,” Bradley says.

Ford got impressive valuations– about a 50 percent expansion of what its price/earnings ratio was before the initial public offerings. The combined value of both deals was 35 percent higher than the value of Ford stand- alone prior to the spin-offs. And it’s likely there are more of these deals to come. The company has indicated a desire to spin off Visteon, and it is conceivable that Ford Credit (Ford’s pioneering automotive finance provider) will be IPO’d, as well.

The result of all this tinkering is a stock price that is up 300 percent since 1996. And even in the shaky stock market of recent months, Ford’s third-quarter shareholder returns, released in mid-October, stand out: record earnings of $1 billion (up 10 percent from a year ago), the tenth consecutive quarter in which earnings have improved. Total return to shareholders is 41 percent through the first quarter, compared with 4 percent for the S&P 500. The company also reported a 10 percent dividend yield, highest among the world’s automotive companies.

A New Model

Despite all the good news, incoming president and CEO Nasser saw a need to shake things up in the executive ranks after his appointment to succeed Alex Trotman. As of January 1, the roles of chairman and CEO will be split between two people. The current president of Ford’s automotive division will serve as part of a leadership team, along with the chairman, William Clay Ford, Jr., the great grandson of the founder.

Still, analysts expect the new openness–and the focus on shareholder value–to continue under the new regime. Maryann Keller is especially bullish. “The repositioning of management could result in even more shareholder initiative–simply because Devine has been put in charge of things that can be spun out,” she says. “He’s now in a position to ensure that Visteon, for example, will maximize its potential. He may decide for Visteon to acquire another company before spinning it to Ford shareholders. The point is, whatever he decides, he is in a position to understand what is necessary.”

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