Ford Motor Should Consider Merger To Survive Cash Crunch, Sales Plunge: Analyst

After posting a nearly a $2 billion loss in the first quarter as the coronavirus pandemic brings manufacturing to a freeze, Ford Motor (F) should consider a merger, according to a Morgan Stanley analyst.

Tim Stone, chief financial officer at Ford, said Tuesday that the company has enough cash reserves to operate “through the end of the year.” At the close of the March quarter, Ford had $34 billion in cash on hand and $35 billion in liquidity.

But Adam Jonas, an automotive analyst at Morgan Stanley, said Ford board members and top executives should have discussions about merging the automaker – perhaps with Germany’s Volkswagen – given that Ford will have an insatiable need more cash and liquidity in the coming year.

“They have to reassess: ‘What are we in China? What are we really fighting for in Europe,” Jonas said. “We don’t think they can necessarily do what some of their Detroit brethren have done in Europe in terms of a full exit so quickly. But those things have got to be looked at. ‘Are we a global automaker anymore?’ I know that might be a tough pill to swallow when you’re from Ford. But you’ve just got to rip the Band-Aid off.”

Ford and Volkswagen had commenced a limited collaboration in January 2019 to develop commercial vans and pickups in some markets beginning in 2022. In July they upgraded their ties to partner on autonomous driving and electrification. However, both companies asserted they remain independent entities.

But Jonas thinks this should change.

“So that Ford-Volkswagen relationship, we think the importance of where that’s really going is elevated,” Jonas said. “It doesn’t have to be a full merger, although I wouldn’t rule anything out. But that strategic fit, geographic fit of — Volkswagen’s not super relevant in the United States, frankly, given their size and global scale. And then, what is Ford outside of the United States? I think even by their own admission, not much.”

A column in CCN.com opined: “A Volkswagen merger would be a gift for Ford investors. But it is unclear if the German company would be interested in absorbing Ford’s low-margin, cash-burning business. Anti-trust regulators and lawmakers in the U.S would also try their best to stop the deal -- if only to prevent the mass American layoffs that would surely follow.”

Meanwhile, Ford faces a mountain of woes.

Cox Automotive noted that Ford sold 514,526 vehicles in the first quarter, down 11% from 2019 figures. The Ford brand itself dropped 12%. The Ford F-Series witnessed a 13% sales drop, while sales of the new Escape plummeted 21%.

Wall Street analysts forecast an even more brutal second quarter – some predicting a loss of more than $5 billion.

Garrett Nelson, senior equity analyst at CFRA Research, downgraded Ford shares to a “sell” from a “hold” recommendation, citing: “We expect monthly auto sales to bottom in April, but do not anticipate a sharp rebound … with a potential liquidity crunch looming as its cash burn accelerates.”

Other analysts are generally cautious to mildly pessimistic about Ford’s near future.

"Now that Ford has effectively secured its balance sheet to survive the COVID-19 pandemic and market crisis, the focus becomes restarting/ramping production, right-sizing cost structure, and managing product portfolio," Bank of America wrote. "We believe the unprecedented market pressure has likely catalyzed Ford’s planned restructuring and cost reduction efforts, while a renewed focus on higher mix and franchise product coming out of the sales/production trough will help support price and margin."

“Cash is king for industrial companies during a crisis, and we expect that the company’s cash burn will be the new point of focus,” said David Kudla, CEO and chief investment strategist with Mainstay Capital Management, an investment adviser based in Grand Blanc, Mich. “Ford’s management has done a commendable job bolstering their balance sheet by drawing down credit lines and suspending shareholder return programs.”

But Deutsche Bank fretted: "Ford’s steep losses and cash use since the beginning of the Covid-crisis, which management expects to get dramatically worse in [the second quarter], are a sobering reminder of the main reasons we are staying on the sidelines of U.S. automakers' stocks: large fixed costs and considerable working capital unwind are resulting in eye-popping cash burn in the current production shutdown."

However, as for a possible merger with a rival automaker, Ford’s Executive Chairman Bill Ford (great-grandson of company founder Henry Ford), vociferously shut down any such notion.

“No,” he said in an Apr. 16 conference call. “As a matter of fact, hell no.”