Fords top subsidiaries stay close to its core
For Henry Ford, diversification was mostly a matter of tinkering with his company the way he had tinkered with the machinery on his father’s farm. For his successors, the search for new revenue streams has been driven by more traditional business motives, including the desire to even out the boom-and-bust nature of a highly cyclical industry.
The further the company has wandered from its core business, the more perilous its journeys have been. Ill-fated diversification has been a factor in the downfall of at least two CEOs, Donald Petersen and Jacques Nasser.
The Big 3
The company’s most successful subsidiaries are Ford Motor Credit Co., which lends customers and dealers the money to buy Fords; Ford Customer Service Division, which sells parts for and services Ford Motor vehicles; and Hertz Corp., which rents Fords vehicles.
Ford Credit, with more than 11 million customers and $1.23 billion in profit in 2002, has been a life preserver during the company’s recent troubled times. As financial analyst Daniel Gross wrote in Slate in March, “Ford today is really a marginally unprofitable auto manufacturer attached to a modestly profitable bank.”
Ford Credit was formed in 1959, two years before Henry Ford II spent $28.2 million ($162 million in today’s dollars) for the spark plug business of Electric Autolite and $83 million ($477 million today) for Philco. He saw the latter acquisition as Ford’s ticket to a potentially vast market; although best known as a maker of domestic electrical appliances, principally radios and TVs, Philco also made transistors and computers, and was an active bidder in the young space program. For example, Philco-Ford Corp. designed and largely equipped Mission Control Center in Houston.
But the corporate fit was never comfortable. Philco-Ford became Aeronutronic Ford in 1975 and Ford Aerospace & Communications in 1976. In 1990, Ford sold it to Loral Corp., when the company’s spending spree of the late 1980s was winding down — along with the economy and Donald Petersen’s tenure at the top.
Hertz was a ‘perfect fit’
Petersen had engineered the $1.3 billion purchase of a controlling interest in Hertz in late 1987 (Ford became its sole owner in 1994). “My board was pressing me to diversify,” he is quoted as saying in Douglas Brinkley’s Wheels for the World. “There weren’t many ways to do it right. Hertz, in my opinion, was the perfect fit. It was a good way to get a Ford product into the hands of Americans.”
He also had expanded Ford’s financial services enterprises. In 1985, Ford Credit “bought a bank, First Nationwide, that soon made its own acquisitions to grow into the sixth-largest savings and loan in the United States,” Brinkley writes.
“Four years later, the renamed Ford Financial Services Group made an enormous purchase, paying $2.7 billion for the Associates Corp., a finance company based in Dallas. Associates made commercial loans but was particularly strong in home-equity lending. From there, Ford Motor pushed into consumer credit; by the early 1990s, Associates began issuing ‘Ford’ credit cards, affiliated with either Visa or MasterCard.”
In early 1988, after three years of record earnings, “Investment bankers were descending on Dearborn with proposals for Ford to buy everything from brokerage houses to meat packers,” write Paul Ingrassia and Joseph B. White in Comeback: The Fall and Rise of the American Automobile Industry. “The meetings of senior executives to discuss diversification seemed endless.”
Petersen’s idea was that Ford should have three main lines of business: cars, financial services and some sort of high-tech company, preferably aerospace. The first two already were covered, but that third line continued to elude him, even though Ford spent more than $6 billion on acquisitions from 1985 to mid-1989.
Still smarting over losing a bidding war for Hughes Aircraft to General Motors in 1984, Petersen set his sights on Lockheed. At the March 9, 1989, board meeting, he proposed buying the mammoth Los Angeles aerospace and defense company for $3.5 billion.
The directors were stunned. Ford had just shut a plant in Mexico for two weeks, its first temporary factory furlough in five years. With the Cold War ending, it was difficult to muster much enthusiasm for a defense-based acquisition. Perhaps worst of all, Petersen sprung his proposal on the directors without any prior discussion. And when they demurred, he whined.
“I would have expected, and certainly hoped for, more support,” he said. “I’m sorry you didn’t see fit to provide it.” As Ingrassia and White put it, “The directors were moved, but not in the way that Petersen wanted.”
Seven months later, Petersen bowed to pressure from the directors and the Ford family and announced his retirement. The Lockheed dispute wasn’t the only factor, and probably not the main one, but it was certainly part of the mix.
Nasser’s rise and fall
A similar scenario unfolded around the turn of the 21st century. The company’s earnings for 1997, 1998 and 1999 dwarfed the records of the late 1980s, and Jacques Nasser, who became president and CEO at the beginning of 1999, thought he knew just what to do with all that money: buy lots more companies, especially of the service and Web-based varieties.
“Within six months, Nasser had replaced a number of long-serving marketing executives with a group of conspicuously young non-Ford vice presidents,” Brinkley writes. “They were there specifically to help Nasser turn Ford from a company built around cars to one built around consumers. … Once a suitably savvy team was in place, the company went on another acquisitions binge, but it wasn’t buying auto companies — it wanted a place in the Internet revolution.”
In Nasser’s first year, Ford formed partnerships with Microsoft, Yahoo!, Trilogy Software, Oracle, TeleTech Holdings, Vehix.com, iVillage.com and Bolt.com; invested in Carclub.com; and became a founding sponsor of the teen-oriented Digital Entertainment Network.
“Nasser presumed that Ford Motor eventually could spin off its Web-based businesses, reaping huge profits even as the company advanced with the latest technology,” Brinkley writes. “He also presided over acquisitions that put the company into service-oriented businesses, some of them only vaguely related to the automobile business. The company bought a chain of repair shops in Great Britain, a concierge service, a company that sold extended warranties, and a recycling firm.”
Nasser’s star fell as fast as it had risen. The Internet bubble burst, the Firestone debacle erupted and the core business — making and selling vehicles —slumped. In 2001, two years after earning an auto-industry record $7.2 billion, Ford lost $5.1 billion, and Nasser lost his job. Board chairman Bill Ford took over as CEO on Oct. 30, 2001.
In a speech the next day at the Glass House, the first Ford to head the company in 22 years told his audience: “We need to get our focus back on the basics of our business — building great cars and trucks.”
You can reach Jeff Mortimer at (Unknown address).