On Wednesday, Ford Motor Company (NYSE:F) announced that it would sell its Jaguar and Land Rover brands to India's Tata Motors (NYSE:TTM). The deal is a fire sale, or garage sale, if you will.

In 1989 Ford purchased Jaguar for $2.5 billion, then, 11 years later in 2000, Ford moved on Land Rover, closing the deal for $2.7 billion. Ford is now letting both brands go for $2.3 billion total. Actually, it's even worse than that; on the close of the deal, Ford will pay $600 million into Jaguar/Land Rover pension funds. With the pension fund contribution included, Ford is really selling both brands for $1.7 billion, one-third the $5.2 billion it originally paid.

Everything Must Go!
What's really going on here is Ford is hurting for cash and needed to make a quick buck.

When looking into Ford's cash position (pre-sale), everything looks rosy with over $20 billion on the books. At least until investors notice the company's debt, which is a staggering $168 billion. The balance sheet is offset with $160 billion in long-term investments, but really, it's just a bad position to be in overall. One helping hand in the deal for Ford is the fact that the company will continue to supply Jaguar and Land Rover with components and powertrains. (To deduce whether a company is generating enough to sustain itself, read The Essentials Of Cash Flow.)

At the end of 2007, Tata Motors was sitting on just under $4.2 billion in debt, with $2.6 billion in current assets. To finance the deal, Tata rolled up support from multiple banks, which will provide financing for 15 months. However, a significant portion of the cash will come from Tata's divestiture of subsidy investments. The Jaguar/Land Rover deal could weigh on Tata, though, perhaps even sucking the company's credit down to 'BB+' status. (To learn about credit status, see High Yield, Or Just High Risk?)

Good Karma for Ford or Tata?
At the end of the day, the deal will help Ford, as the company will be relieved of some of the cash issues Jaguar and Land Rover were causing. However, the company's is still far from "out of the woods", and will likely encounter difficult quarters for a few years. It's important to note that the Tata deal is not expected to close until the end of the second quarter. However, shares are severely beat down since the turn of the century, and for investors who can handle short-term punishment, Ford could still be a long haul winner.

It's too early to call the outcome for Tata Motors. Investors should remember that Land Rover and Jaguar, while pretty to look at, have been cash black holes for several decades. Tata has its work cut out for it. The company has stated that it does not plan on shifting management, closing plants, or cutting workers. But when the deal closes, Tata may sing a different tune.

Bottom Line
Ford's buy high, sell low strategy really stings, but at the end of the day, it was something the company needed to do to relieve pressure within the company. Now, Ford can divert the cash it would have been pumping into Jaguar and Land Rover to its core product lines. While the deal seems like bad news for Ford, it could be a small step toward a completely new chapter at the company, something that could reward investors in the years to come.

For further reading, check out Analyzing An Acquisition Announcement.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has corrected...now what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  10. Professionals

    Tips for Helping Clients Though Market Corrections

    When the stock market sees a steep drop, clients are bound to get anxious. Here are some tips for talking them off the ledge.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  5. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  6. BHD (Berhad)

    The suffix Bhd. is an abbreviation of a Malay word "berhad," ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!