Friday, April 15, 2005

Did he really leave to pursue “other interests”?

On April 11, Ford Motor Company’s (NYSE: F) Head of North American Marketing, Sales and Service Group, Earl Hesterberg, resigned abruptly after only six months in the post. The same day, Group 1 Automotive (NYSE: GPI), a Houston-based auto retailer, announced that Mr. Hesterberg would become the company’s new CEO. A Ford’s spokesperson said Mr. Hesterberg left to pursue “other interests” and that he was being replaced by Stephen Lyons, another Ford veteran, previously head of Ford division. Additionally, Darryl Hazel, former president of the Lincoln Mercury division, was said to replace Mr. Lyons. Moreover, this top management reshuffling comes a few weeks after a similar situation occurred in General Motors, showing the hard times US automakers are going through.

The news of Mr. Hesterberg’s departure came only two days after Ford announced it was lowering its earnings forecast by almost 30% (from $1.75-$1.90 to $1.25-$1.50) for 2005. According to Ford, the forecast revision was connected to higher gas prices and raising healthcare costs. Ford also warned that pre-tax profit for 2005 would breakeven at best, when the company had previously forecasted $1.5 billion. Additionally, Ford said it will not be able to achieve its projection of $7.0 billion pre-tax profit for next year, which was William Ford’s upbeat forecast when he took over the company in 2001. Ford’s CFO, Don Leclair summarized the situation stating that: “the company’s analysis of recent market trends, which include the prospect of higher and sustained gasoline prices and continued aggressive pricing actions by competitors, have lead us to conclude that further challenges lie ahead.” As a result, rating agencies Standard & Poor’s and Fitch have changed Ford’s outlook to negative as an indication that they could downgrade the company to levels closer to junk status.

Earl Hesterberg’s appointment, in October 2004, as Head of North American Marketing, Sales and Service Group sought to improve Ford’s situation in the company’s most important region. Mr. Hesterberg seemed to be the appropriate replacement for veteran Jim O’Connor, who left the post after having been 40 years with the company. He possessed a long experience at Ford combined with interim stints at Nissan Motor Co. (NYSE: NSANY) and as president of Gulf States Toyota (a multi-billion dollar franchise). As a result, he had good internal knowledge as well as valuable industry and market intelligence. It was clear since the beginning, that Mr. Hesterberg would rely on new products to increase the company’s retail share. During conversations with industry analysts and reporters he was quoted saying that “Now we should have a better chance”; referring to the likelihood of increasing market share through his new model initiatives such as the Ford 500, Mercury Montego and Freestyle. However, recent results showed that none of these cars have met the sales volume targets, adding to Ford’s long list of problems.

We believe there is more to Mr. Hesterberg’s demission than the official version stating that he pursues “other interests”. It is possible that his pursuit of “other interests” sheds some light into serious and unknown problems within the company. We also think that it could be possible the company ousted Mr. Hesterberg due to his inability to accomplish his goals, and that it is handling this in a way that minimizes its negative market effect. With the available facts one could build a case for any possibility, however, we feel more inclined to believe that he left to pursue “other interests” motivated by problems within the company. The fact that his departure came only two days after the company’s guidance revisions showing a bleak outlook could suggest that he was fired and that Ford followed a strategy trying to minimize negative effects of the announcement on its stock. However, one could argue that this is unlikely because his initiatives haven’t had enough time to mature given that he has spent only 6 months in the position. Moreover, one could also argue that it is unlikely that he left the company (for “other interests”) having just recently pushed his ideas, unless other factors made him realize he had come to a dead end. This is precisely what we suspect. Another crucial piece of information is that during the same day; Group 1’s CEO and president stepped down, Hesterberg announced his departure, and he was appointed as this company’s new CEO. This leads us to believe that the move was carefully planned by both parties over some period of time. Most importantly, we don’t consider this to be an advance in Mr. Hesteberg’s career; on the contrary, he went from heading an approximately 45 billion dollar operation to one that is roughly one-tenth that size. Finally, we sustain our belief that his departure might have been motivated by Ford’s problems rather than his personal interests. Earl Hesterberg’s decision should be taken very seriously given his extensive automotive industry experience. This event should provide a very valuable clue for analysts and industry experts to solve the Ford puzzle.

By: Hernan F. Lozano, Carlos Gomez and Roberto Hiriart


Blogger bill said...

The author of this article obviously dosent know what he is talking about. Mr Hesterberg left the company because it was a great opportunity to run a comapany that is just overall better then ford but still in the car buisness. Mr Hesterberg is perhaps one of the most succesful people in the car buisness today and he is also higley respected. So i suggest the writer of this article ..should revise what he is saying and tell the truth. Cause he really dosent know anything about what he is saying.

8:30 AM  

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