“Do it,” Ford told Leclair. “Get as much as you can.”
The company began informal negotiations with the major investment banks. People were asked to work their contacts to figure out which ones were most likely to lend. Board members with banking ties—such as Sir John Bond, who had just retired as chairman of HSBC Holdings, and former U.S. Treasury secretary Robert Rubin, who was also a member of Citigroup’s board of directors, also began making calls. By the time Mulally’s hiring was announced, discussions with three of the biggest banks on Wall Street—Citigroup, JPMorgan, and Goldman Sachs—were already well under way. They would become Ford’s loan advisers and the core of the lead lending group. And they were already making it clear just what they meant by “everything.”
Ford would be required to stake all of its domestic assets: its factories, its office buildings, and its patents. The banks told Ford that its assets were now worth so little that nothing short of an enterprise-wide valuation made any sense. They also wanted Ford Credit and Volvo put up as collateral. They even wanted the Ford logo itself. The banks knew that, even if the company collapsed, some Chinese automaker would pay good money for the right to stamp the Ford name on its cheap subcompacts. If Mulally failed to turn things around, Henry Ford’s worst nightmare would come true: The big banks would finally get his company.
Ford’s finance team tried to keep anything they could sell off the table in case they needed to raise even more cash. They won a few concessions. The Jaguar and Land Rover brands were excluded from the deal. So was Ford’s stake in Mazda, though language was added that would allow the automaker to add its Mazda shares later in exchange for a higher credit limit on the revolving loan that would make up the biggest portion of the package. Volvo could be sold, too, but only with the approval of Ford’s lenders—and half the proceeds would have to go toward paying down its loan.
Bill Ford knew that, if he did use the company as collateral, it would be the automaker’s last chance to save itself. If Ford defaulted on these loans, the game would be over—at least as far as he and the rest of the Ford family were concerned.*
The business-minded members of Ford’s board understood why this was the only option left and were willing to place the bet. So was Alan Mulally. Before accepting Bill Ford’s offer, he asked for assurances that he would have the money he needed to pay for his plan. Convincing the Ford family to mortgage their birthright would be a far tougher sell. They had not cashed in their shares when they were worth a fortune, and they certainly were not going to be eager to bet them all on a make-or-break gamble. So Bill Ford decided to package his finance proposition with some more positive news. He held off telling the family about the finance plan until the meeting in September when he presented Mulally to them. Ford knew his new CEO made a great first impression, and he believed the fact that Mulally already had the outlines of a compelling turnaround plan would convince them that he was not risking their patrimony on a long shot. Once they had met Mulally and heard him out, Ford made his pitch.
“You’ve seen the plan,” he told his relatives. “If you want us to execute it, you have to fund for it. This is the only option left to us.”
It was a masterful move. In the end, no one in the family opposed the decision. They understood the reasoning behind it. That did not mean everyone was thrilled with the idea. In fact, the dissidents would try to leverage this unease a few months later in one final bid to split the family. But, for now, Bill Ford had the support he needed to send Mulally to New York.
Neil Schloss, Ford’s assistant treasurer, and other members of the automaker’s finance team spent hours on the telephone with each of the company’s existing lenders trying to persuade them to pony up more cash. They made the same argument to each one. These banks were already major investors in Ford. Subscribing to this new finance offering would increase their exposure to the company, but it would also dramatically improve their position because it would transform them from unsecured to secured lenders. Even if this ended up being a case of throwing good money after bad, they would at least end up holding something more than worthless paper.
Though the banks were already receptive before Mulally’s name was even mentioned, their attitudes toward the deal improved markedly after his hiring was announced. Mulally’s reputation preceded him on Wall Street, and Bill Ford’s decision to get out of the way and bring in an outsider with real turnaround experience telegraphed that this would not be yet another halfhearted attempt to save the automaker. By the time Mulally left for New York, Citigroup, JPMorgan, and Goldman Sachs had already pledged $800 million each to the company, as had four other banks that would form the lead group in the financing deal. More important, all of the banks had agreed to allow Ford not only to publicize this fact at the meeting but also to use their names. This was key to convincing other banks to sign up, because it showed that some of the biggest names in finance still believed in Ford.
On Monday, November 27, Ford announced that it was seeking $18 billion in financing “to address near- and medium-term negative operating-related cash flow, to fund its restructuring, and to provide added liquidity to protect against a recession or other unanticipated events.”
Specifically, Ford said it would seek a new five-year secured revolving credit facility worth $8 billion to replace its existing unsecured $6.3 billion revolver, a senior secured term loan of about $7 billion, and a $3 billion unsecured note, convertible into Ford stock. As collateral, Ford said it was prepared to mortgage nearly all of its U.S. assets, in addition to all or part of its stock in subsidiaries like Ford Credit and Volvo. The company said it expected to close the deal by December 31 and hoped to end the year with $38 billion in liquidity.
It was the first time in the company’s 103-year history that it had staked its assets as collateral, and Wall Street took it as a sign of desperation. Analysts had expected Ford to seek additional financing, but this went way beyond what any of them had anticipated. Ford’s stock tumbled by more than 4 percent on the news, closing at $8.16 a share. More ominously, Standard & Poor’s and Moody’s dropped their ratings on the company’s notes deeper into junk bond territory, saying Ford’s move would make it more difficult for unsecured bondholders to recoup their investment if the company defaulted on its debt.
“This is Ford’s one last shot to get it right,” veteran Wall Street analyst John Casesa told me at the time. “If the restructuring plan is not executed flawlessly, the company will lose its independence. Management is staking the entire future of the company on successfully executing this plan.”
But he also said it was the only option left to Ford, “short of finding a well-capitalized partner.”
As Mulally approached the rostrum in the ballroom of the Marriott Marquis hotel in Times Square on November 29, he was confident he could close the deal with the bankers. He had met many in the room as president of Boeing’s commercial aviation division, and was certain most of the others knew him by reputation.
These guys know what I can do, he thought. I just have to convince them that I can do it again.
“It is a pleasure to be here today to discuss opportunities we think you will want to become a part of,” he began. After his introductory remarks, Mulally offered an unflinching assessment of the challenges confronting Ford.
“We face an industry that is increasingly competitive. Consumer preferences are changing, particularly in North America, where higher fuel prices are shifting demand from trucks—our strength—to cars. And excess capacity continues to add downward pressure on prices,” he said. “The industry also faces rising health care costs in the U.S., high commodity costs, and a fragile supply base, particularly in North America.”
Next, Mulally acknowledged the problems that were uniquely Ford’s.
“Ford also faces many company-specific challenges. Our market share has been declining in North America; it is critical we stabilize our share in our home market. Manufacturing capacity exceeds demand, and our cost structure
is not competitive. Finally, our business units are not well integrated, resulting in a high level of complexity in the company,” he said. “The number-one thing we need to do is to deal with our reality, and tackle these issues head on.”
Then Mulally shared the broad outlines of the plan for the first time outside the company.
“A key opportunity going forward is to operate as one company. In my short time with Ford, I have seen that we have many largely separate, regional companies operating around the world,” he said. “There are substantial business opportunities for Ford from leveraging its global assets and integrating the regional business units. Operating as one company also will allow Ford to accelerate our product development efforts, increase scale, and develop more efficient global designs.”
Mulally closed with his sales pitch, listing the reasons why the bankers should open their checkbooks.
“We are accelerating actions to improve our cost structure through personnel reductions, capacity reductions, and restructuring our supply base,” he said. “While restructuring the company, we must continue to invest in new products. Leveraging our global product development and production systems will enable Ford to develop more products, and to develop these products faster and more efficiently. Developing more new products will mean Ford will be competitive in the marketplace when our restructuring takes hold, allowing the company to deliver profitable growth.”
All of this would require money—more money than Ford had on its balance sheet.
“This liquidity is needed to execute the plan I have highlighted to transform the company and provide a cushion to protect for a recession or other unexpected event,” Mulally told them. “I hope you will see the opportunity I see at Ford.”
Next came in-depth presentations by Leclair and Petach that dissected Ford’s public financial data. After that, the bankers had to make a decision. Those who wanted to know more could stay and listen to Leclair and Petach deliver a detailed overview of the company’s financial projections for the next five years. By doing so, they would become insiders and lose their ability to trade in the company’s stock and bonds. But they would get a much clearer picture of Ford’s finances. The rest would have to leave the room.
In the private briefing, Mulally walked the bankers through every element of his emerging plan for Ford. He showed them his new product road map, with its emphasis on small cars and crossovers, and he went over Ford’s quality and productivity goals. Mulally also told them he was prepared to take the difficult steps necessary to return Ford to profitability. He would close more factories, cut more jobs, and sell off the money-losing British brands.
From the comments and questions he received after the presentation, Mulally was convinced that many in the room were impressed. That sense was reinforced during a series of private, one-on-one sessions with individual banks held before and after the two group meetings.* By the time Mulally got back on the plane to Michigan, he was confident Ford would get the money he needed to implement his plan—and enough to cushion the automaker from any economic potholes that might lie on the road ahead.
His optimism was not misplaced. Citing “overwhelming support by lenders,” Ford announced on December 6 that it now hoped to secure more than $23 billion in financing.† The amount of the unfunded revolver was increased to $11 billion‡, while the size of the convertible note was increased to $4.5 billion—with a stipulation that Ford could increase that amount to $5 billion if it was oversubscribed. It was. By the time the deal closed on December 31, the automaker had managed to borrow a total of $23.6 billion. The size of the total package far exceeded Ford’s expectations. It was a testament to Wall Street’s confidence in the company’s new CEO.
Back in Michigan, the automaker’s executives waited for the response from the banks and dealt with the fallout. Bill Ford ran into General Motors CEO Rick Wagoner and Chrysler CEO Tom LaSorda at a regularly scheduled meeting of industry leaders, and both expressed their dismay at his decision to bet the company.
“Are you crazy?” Wagoner asked.
Ford shrugged.
“We’ve got a big restructuring ahead of us,” he said.
“Well, we’ve already done ours,” Wagoner replied.
Oh? thought Ford. Really?
“You’re going to regret this,” Wagoner insisted, pointing out that the interest expense alone would be a huge drag on Ford’s balance sheet—not to mention how it looked to investors.
“Well, to me, it’s the only thing that makes sense,” Ford said. “It’s all going to be in the execution. If we borrow all this money and don’t execute, you’re right. But if we can execute against the plan, then I think this is absolutely the right thing to do.”
While Wagoner remained dismissive, LaSorda listened closely to what Ford had to say and asked him to elaborate.
Wagoner’s reaction to Ford’s funding request was a bit disingenuous. In July of that year, GM had used some of its own North American assets—including inventory, plants, and property—to secure a $4.6 billion revolving loan. And just a month before, GM had pledged some of its factory equipment to secure a $1.5 billion loan. The company would soon wish it had followed Ford’s example and mortgaged everything.
Many industry observers would later opine that Ford owed more to luck than skill in doing the finance deal when it did. After all, who could have guessed that the global credit markets were about to seize up like a bad motor? Bill Ford bristles at that notion. He remembers the tough discussions with Carl Reichardt, Don Leclair, and others in the company about the growing need for more cash and the looming prospect of tighter lending. Mulally has also expressed dismay at the suggestion that Ford was just lucky. After all, he specifically told the bankers in New York that Ford was looking for a cushion against a potential recession.
At the time, analysts recognized that the company was being smart.
“We think Ford is taking advantage of a favorable debt market to grab as much financing as it can, lowering the risk of insolvency as it works to restructure,” wrote Goldman Sachs analyst Robert Barry in a note to investors following Ford’s initial funding request.
Did Ford see the credit crisis coming? Certainly not the full magnitude of it. But it is clear that Ford knew the game was changing and had the foresight to get as much cash as it could before it was too late. Other automakers would not prove so prescient. In the end, they would have to borrow their money not from the big Wall Street banks, but from the American people. Ford’s financing deal would allow it to survive without a government bailout. If Bill Ford had not convinced his family to stake everything, the Fords likely would have lost control of the company entirely. A few months later, such a deal would have been impossible for any American automaker. A year later, even the most profitable companies in the world would have been unable to borrow half that amount.
Mulally now had the money he needed to bankroll his revolution. But the decision to go all in had not just provided Ford with the cash it needed to fund its restructuring—it also made it clear to everyone inside and outside the company that there would be no more halfhearted attempts to save the automaker. This time, Ford would finally fix its fundamental problems, or it would die trying.
*Under the terms of the final lending agreement, Ford would get the Blue Oval and the rest of its collateral back only after it paid off the revolver and had two of the three major debt-rating agencies elevate its credit rating back to investment grade.
*These smaller meetings were held at the nearby Waldorf-Astoria hotel.
†Once again the markets would ding Ford for upping its borrowing. This time, Ford’s stock dropped another 4.2 percent on the news—falling to $7.36 a share—while Fitch would further downgrade the company’s debt rating from B to B–. Most analysts were beginning to see the logic in Ford’s moves, though.
‡The underwriters could also sell an additional $500 million more than originally planned through what is commonly refered to as a greenshoe option.
/> CHAPTER 8
Assembling the Team
If everyone is moving forward together, then success takes care of itself.
—HENRY FORD
Mark Schulz was getting on Alan Mulally’s nerves. First the head of Ford Motor Company’s international operations had tried to get out of the weekly business plan review, or BPR, meetings. Now whenever Mulally tried to understand what was going on in Asia or Europe, he found he had to go through Schulz, who rarely gave Mulally a straight answer.
Schulz did not seem to think he had to. He had forgotten more than Mulally knew about the automobile industry. Moreover, he was one of Bill Ford’s closest friends at the company. They were fishing buddies who had worked together for years. Schulz was confident he could deal with the Mulally situation the next time he was alone with Bill Ford on a trout stream. Until then, he remained evasive and bureaucratic.
Mulally never lost his temper with Schulz. He continued to invite him to “join the team,” but Schulz refused to play by Mulally’s rules. When his new boss put a limit on how many slides each executive could show each week, Schulz brought twice that number. The next week, he went to China and did not call in for the Thursday meeting at all. When Schulz returned to Dearborn, Joe Laymon took him aside and warned him not to test Mulally’s patience.
“You’re going to get your ass fired,” he cautioned Schulz. “Bill can’t save you on this one.”
“He’s still the chairman of the company,” Schulz shot back.
“Yes, but he hired a guy to run it for him—and if this guy says, ‘I need this team to run the company’ and it doesn’t include you, Bill’s going to give him his team,” Laymon said. “Don’t impose on Bill’s friendship. Don’t put Bill in a position where he has to make a decision.”
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