Analysis of

Case study
3
Massey-Ferguson
1980
M.Faisal Hayat (10L-5424)
Zia Shaukat
(10L-5416)
M.Farooq Aslam (10L-5414)
M.Shafeeq
(10L-5435)
Section :A
MBA(1.5)
Submitted to:
Prof Dr.Zafar Iqbal

Case Analysis Massey Ferguson 1980:

Massey Ferguson Limited an International producer of Farm machinery and diesel engine started
its operations way back in 1847 and by the end of 19th century they had operations throughout 31
countries of the world. In 1978 Company had financial loss of US. $262.2 million .

Masseys Strategies:
1) Product-Market Strategy:
Masseys product line consisted of tractors, combine harvesters, balers, forage harvesters,
agriculture implements, farmstead equipments and other equipment for agricultural use.
Industrial line consisted of Industrial tractors, loaders, rough terrain forklifts, skid steer loaders,
utility loaders and skidders. In 1980 Massey was holding

17% market share worldwide in tractors.

14% market for combines.

13% in Industry machinery.

History shows that Massey had been strong in Market outside North America and Western
Europe. Massey Production facilities were also across the different region of the world (Exhibit
5). Largest facilities were located in Canada, France, England, and Australia. In less developed
countries like Pakistan, Peru, Egypt, Iran, Libya, Turkey, Saudi Arabia, Sri Lanka, Sudan and
Mozambique Massey was quite successful in carrying out the contracts and operations. It is quite
obvious as Massey got $360 million contract to update Perus tractor and diesel engine industry.
In 1980 Massey purchased diesel engines from Perkins Engine Group which was the producer of
diesel engines in England. 50% of Perkinss diesel engine export worldwide was to Masseys
subsidiaries and affiliates. Because of rising gasoline prices there was huge shift to diesel
engines, so it was bringing in an effective market to Massey as well.

2) Financial Strategy:

During 1960s and 70s Massey was aggressively involved in expanding its operations and
building up new assets which was majorly financed by Debts that of short term nature .By 1978
Masseys
Debt/Equity ratio= 214% (Exhibit 4)
Same year Massey lost US. $ 262.2 million, management associated this loss to following
reasons:

High Interest rates

Imposition of Monetary policies and credit restrictions in Argentina and Brazil, which
ultimately causes sales to decline.

Decline in North American natives income and higher prices of products.

Beside this loss company laid off their employees from 68,000 to 47,000, reduced inventories
from US $.1083.2 to US $.988.9 million, 24 plants were closed. Despite all these moves there
were continuous losses all around the world especially on operations that was approx US $35.4
million or US $.2.38/share. At the end of first 3 quarters of 1980 company had unfavorable loss
of US $ 62 million including currency adjustments of U.S $ 37 million.
3) Comparative Strategy:
Massey Competitors in farm and industry sector included:

Large multinational companies with full product lines

Medium and small enterprises, conducting business locally with restricted range of
products.

Named: Deere & co and International harvesters. Massey was traditionally ranked 3rd in sales of
farm equipment behind Deere & Co and International Harvesters. However in 80s Massey
occupied 2nd position in market for small tractors and combine harvesters.
In contrast with its competitors, Massey Ferguson chose to finance its expansionary agenda
primarily through debt offerings and short term credit lines. This type of structuring had very
detrimental implications for Massey Ferguson. The use of so much leverage would increase the
risk of the projects they were undertaking beyond the industry standard. Firms in the same

industry such as Deere and International Harvester throughout the 1976-1980 period maintained
debt/capital and STD/capital percentages consistently lower than Massey Ferguson (a trend that
exacerbated as time went on). Therefore if the farm equipment market were to weaken,
relatively,

Massey

Ferguson

would

find

itself

in

less

favorable

position.

Along with the increase of risk on projects, the heavy use of debt financing also restricted
Massey Ferguson's financial flexibility. Massey Ferguson's debt finance structure is spread out
among 21 different lending institutions in over nine countries. Each one of these lenders having
debt covenants of their own with the arrangement that if one of these covenants were to be
broken all of Massey Ferguson's debt becomes callable. These types of restrictions can impede
company financial options during down times (as they did when Massey Ferguson attempted an
equity issuance in 1978). The emphasis on short term credit lines was also a questionable choice
of finance structuring. Expansionary/market penetrating strategies typically pan out by taking
losses in the short term in order to realize larger gains in the long term. Along with an
expansionary strategy, Massey Ferguson was also increasing spending in R&D for production of
higher horsepower tractors to market in North America and for diesel engine production.

What went wrong?

1) Market-wide problems:
High interest rates after the 1973 oil crisis and the 1979 energy crisis, the US economy was
affected by stagflation. In an effort to fight excessive inflation, the Fed adopted a tight monetary
policy, raising interest rates (as an illustration, the federal funds rate increased from 11% in 1979
to 20% by June 1981).This affected all players as it led to a plunge of stock market prices, on the
one hand, and an economic recession, on the other. Furthermore, Massey was particularly hit
hard: since it mainly financed its operations with short-term debt, its financing cost went up
dramatically.
2)Low demand
The above-mentioned monetary policy pushed the American economy into recession. Massey's
renewed drive into North America (by 1978, it had introduced a new range of large, highhorsepower tractors and an improved baler line) unfortunately
had to suffer

demand went down and MF

3) Exchange rate:
High exchange rates were another area of concern which damaged the MF as the pound sterling
rate was increasing. MF cost of goods sold also had a direct impact which ultimately cut the
profit of the company and company lost its competitive edge.
4) Capital structure:

Massey's financing choices over the years brought with them many problems, which

aggravated the already grim situation in the product markets. First, during its expansion in the
1970's, Massey levered itself immensely. Compared to its two main competitors, it
systematically had the highest Total Debt/Capital ratio (in 1980: 80.85% compared to
53.56% for International Harvester and 40.28% for Deere & Company). While this might
have been justified by the growth strategy, it turned out to be very damaging for the company in
view of the current situation. What was more unusual was the fact that it used short-term debt to
finance its business operations, fixed asset capital maintenance, and long-term principal and
interest repayments. As a result, Massey was much more affected by the increase in interest rates
than that of its competitors where MF lost its edge. Cost of debt of MF in 1980 was 229.9
million $ compared to net income of 225.2 million $ that shows the real story.

Alternatives Available:
The major alternatives available to MF are:
1) Merger:
Under the current scenario, no company will be ready to merger with MF as:

Companys shares worth was around $100 million but at the same times
additional capital of $ 500 million was required to carry on operations which was
not possible under the current circumstances.

Companies short term debts were about to mature which was another additional
burden on the part of company.

MF had 100 million $ of receivables in this recession era.

Additional 100 million $ inventories were there in demand decreasing market

scenario.

2) Divestitures:
Another option that MF has, to cover up its loss by selling any of its unit but financial side of the
company and Product-market position doesnt make this option viable.
3) Liquidation:
If MF goes for Liquidation option same situation remains that:
Stakeholders will not get anything out of it as already companys financial value is very
much down to $5 from 25$
$ 1 million receivables and inventories will not be going to pay at their full that is again
loss for the stakeholders.
Under the current financial circumstances MF value will further go down if liquidation
option is to be considered.
4) Refinancing:
The last considerable option to MF was refinancing the capital structure so as to bring in the
balance between the equity and debt structure. But under the circumstances bringing in stocks
will not be easy consideration as investors will not be ready to finance such project which is
already close to be defaulted. So company can consider
Converting debts to equities
Government Guarantee
Sweeteners with new debts

Financial Advice :
Refinancing is an alternative that is best to be considered, our suggestion to MF are:
MF should convert their debts to equity on immediate basis as debt holders will not get
anything if company gets default and by getting shares they will be the part of companys
board of directors as well.

 On immediate base they can request their stake holders to hold on for certain time frame.
Company will pay them interest with betterment in finance positions.
Sweeteners or warrants are other option they can offer to debt holders that will bring in
something positive to opt for as MF has good chance to come up with finances.
Government being the key stakeholder is ready to guarantee the new equity investment in
Massey as if company closes its operations ultimately thousands of employees will be
direct burden on the govt.

Learning From the Case Study:

The major learnings from the case study are:

Organizations should not aggressively opt for aggressing financing when they are dealing
in highly cyclical market where risk is high or highly uncertain.

Aggressive debts in good times are not a good financial strategy, organization should
create a balance between capital structures and bring in equity financing when in good
time.

Interaction of product market and financial risk should be carefully considered while
carrying on various long term strategies for the organization.

Competitors strategies should be monitored while designing financial structure, dont act
short sighted.