Ford (
F) doesn't need another PR problem right now. But that's just what it deserves after offering recently to buy out public investors in its Hertz car-rental unit for $30 a share. It's an abusively low bid--I'll explain why in a moment--that erodes Ford's credibility when the Explorer debacle demands that it instead rebuild public trust. To small investors, Ford's move also serves as a sharp reminder: Pick your business partners with care.
Ford isn't the only company ever to play lowball. In fact, weeks before its Hertz (
HRZ) bid, investors in Avis (
AVI) got a similar offer from principal shareholder Cendant (
CD). Yet it's safe to say no one imagined this outcome back in 1997, when Ford sold 19% of Hertz in an initial public offering led by J.P. Morgan. The world's No. 1 car-rental agency came public at $24 a share and didn't look back, closing its first day above 27. Last year, it topped 64. As growth slowed, the stock slid and spent most of this year in the low 30s.
Until Aug. 31. That evening, Hertz warned Wall Street that its earnings estimates for the second half and 2001 were too high. Yet it emphasized that while profits will be growing more slowly, its prospects remain bright. Like Wall Street cared. The next day, Hertz's Class A shares (the ones owned by the public) plunged and kept on sinking. By Sept. 20, they closed at $24.25--a new low, just 25 cents above the IPO price. The next day, Ford made its $30 bid.
''TERRIFIC BRAND.'' Somersaulting SUVs are easier to visualize than stock market maneuvering. But if you follow closely, you'll see something seriously awry here. At $30, Ford is valuing Hertz at nine times the past 12 months' net. When Ford took Hertz public, it asked more than 16 times. Last year, buyers paid 24 times. Had Hertz withered, a lower multiple might make sense. But no. In 1996, the year before its IPO, Hertz had sales of $3.7 billion. In the year ended June 30, sales topped $4.9 billion. In 1996, annual profit stood at $159 million. In June, it surpassed $359 million. In 1996, Hertz's operating margin was 7%; now, it's 12%.
Perhaps the future is dim? No. While growing more slowly, it still expects a record net of $3.30 a share this year, and analysts see $3.42 next. Has Ford spotted something lurking around the corner? No. ''Hertz is a terrific brand,'' a Ford spokeswoman said. ''It's going to be a key part of our strategy.'' She added that Ford and Morgan, which came up with the $30 price, think it's fair. Yet neither was willing to detail why.
Hertz has been trading near 32, a bet that Ford ultimately will pay more. One hope is the three independent Hertz directors charged with weighing the offer. But how aggressively they'll champion the interests of minority shareholders is questionable. For one thing, Hertz's proxy statement shows that among them the three own just 6,000 Hertz shares. And instead of expressing dismay at Ford's offer, they're all keeping quiet. One, Munder Capital Management Chairman Michael Monahan, told me it would be ''inappropriate and foolish'' to discuss the bid now.
Chances are, Ford in the end will nudge its offer up, but nowhere near fair territory. One institutional holder of Hertz thinks anything below $40, or 12 times this year's earnings, amounts to stealing. Ford has the votes to cram through any price it wants. If it pays $30, its discount would come to nearly $200 million. Outrageous.
What might investors do? Complain to Ford (313 322-3000). Complain to Hertz (201 307-2000). Complain to Hertz's independent directors (besides Monahan, 248 647-9200, they are consultant Louis Burnett, 415 398-0700, and IBM Senior Vice-President John Thompson, 914 499-1900).
Meantime, it's worth reflecting on just how weak minority shareholders can be. ''You've got to pay attention to where you sit at the table,'' said John Wakeman, an analyst at a big Hertz holder, T. Rowe Price. ''There's only so much that a board of directors can do for you.'' As Hertz's 1997 prospectus warned: ''Ford will have the power to determine matters submitted to a vote of [Hertz's] stockholders without the consent of [Hertz's] other stockholders....Conflicts of interest between [Hertz] and Ford could arise.'' It's easy to write off such stuff as so much boilerplate. But conflicts that can arise often do.
Copyright
2005, by The McGraw-Hill Companies Inc. All rights reserved.
