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Why Ford didn’t spin off its electric-vehicle business

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Jim Farley, Ford CEO, poses with the Ford F-150 Lightning pickup in Dearborn (Michigan), May 19, 2021.

Rebecca Cook | Reuters

Ford Motor said on Wednesday that it will separate – but not spin off – its electric vehicle business from its legacy autos operations.

Wall Street analysts, investors have been pressing Ford and other legacy automakers to get rid of their electric vehicles operations in the hopes that they can capture a higher valuation than those given to some EV start ups.

While CEO Jim Farley and other Ford executives readily acknowledge that some separation between the company’s EV efforts and its legacy internal-combustion-engine business makes sense, they argue that a full spinoff would have put Ford at a disadvantage to both old and new rivals.

Farley explained that today, “our corporate structure is holding our back.” This hinders our ability to be focused. The ICE business must be cash-generating and serves customers. [Ford’s]It is the iconic brand. Innovation is the key to our digital and electric businesses. It is impossible to ask our team members to perform both simultaneously.

Why wasn’t Ford able to spin off its electric vehicle business?

A spinoff makes sense. In theory, a spinoff would allow the part of Ford that’s likely to see significant bottom-line growth – the EV business – to win a valuation comparable to those of other pure-play EV makers.

Analysts say that Ford’s mature ICE unit is not growing at all, which could lead to a drop in the company’s overall value. Morgan Stanley analyst Adam Jonas argued, in a November Note, that ICE’s “de-adoption” could limit Ford’s ability ramp up EV production. Ford would have to look at “nontraditional” options such as a spinoff in order to attract capital and the talent required to produce electric vehicles.

But Ford executives say that the company – and its investors – will be better off with its EV and ICE businesses under one roof, albeit with much more separation than the two have had until now.

Farley claimed Ford has “leverage”, as it can tap into the strengths of other organizations like the Ford Pro commercial vehicle unit.

We aren’t going to make separate brands. Farley explained that we are not going compete against each other. “The magic in this is to focus both organizations on what they need to focus on, more than asking everyone to do everything like we do today … and to get that leverage between both organizations.”

“If we spin out this one or both of these entities or all three, then we are really at risk for that leverage.”

The advantages of separating the units are numerous, to an extent.

Ford’s plan is to run its new EV unit, called Ford Model e, like a startup – with lean, flexible teams, a culture of innovation, and the ability to create “clean-sheet” designs that don’t necessarily draw on the existing Ford product lineup.

Farley will serve as Model e president. However, the day-today management of Model e will fall on Doug Field who is an ex-executive at Apple and Tesla.

Field said that unlike other EV startups, Model e has the advantage of an integrated relationship with a profitable legacy automaker – but it will also see advantages from the separation.

Field explained that in order to attract the top technical talent, “we need culture” for some new technologies. Field stated, “We only want the best.” It doesn’t matter if they wear bunny slippers to work, we have to have the best employees.”

Field explained that making the EV unit a stand-alone business under Ford will help to attract talent.

His statement was that we need to be able to adapt our work methods in order for us all, and also have the ability to use remote work. Model e is designed to allow us access to top talent.

Ford doesn’t have to raise capital to fund its EV plans

A spinoff Ford’s electric vehicle unit could allow the company to profit from its low-cost pure-play-EV valuation, according to some analysts. That capital could then be used to fund the company’s ambitious future-product plan – or perhaps, to fund an even-more-ambitious plan.

Ford executives claim that the company doesn’t need to raise capital from the outside for its EV business plan. Ford will make enough profits from its ICE trucks or SUVs to pay for the company’s EV plans.

Ford’s current cash machine is its F-Series truck franchise worth $42 billion. It has been America’s best-selling car for many decades.

Ford is able to finance the development of EVs internally by keeping the two businesses separate.

Farley stated, “We looked at spinoffs. But, no. Farley explained that we could fund it ourselves. We don’t require access to capital markets. He also stated that the spin-off of one or both would result in the loss of synergies, and even less leverage.

A compromise that appeased Wall Street – for now

Ford’s restructuring plans are, in part, a concession to investors and analysts. It’s separating the operations and providing greater transparency by breaking out their results by next year, while keeping the company whole – something that Farley believes is necessary to lower costs for both operations.

Farley explained that the change in Farley’s company isn’t about its financial management. This is all about capability, focus, improved products and better experiences. This is how our company will win.

Shares rose 8.4% to $8.10 Wednesday thanks to investors. This stock has fallen 15% in the past year.

While analysts generally praised Ford’s split, some remain hopeful that Ford will continue to spin-off the operation in the future.

“We note that as the BEV business matures, strategic options could reemerge later in the decade — much as multiindustrials continue to refine their portfolios,” Barclays analyst Brian Johnson wrote Wednesday in an investor note.

 

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