Massey-Ferguson, 1980
Business risk:
Massey-Ferguson is the company called “the one true multinational”. Its products were sold to all over of the world. Massey has two categories of products, farm and industrial machinery and diesel engines. For the farm and industrial machinery, North American and the United Kingdom were account for 81.3% supplies for the whole world market. And for the diesel engines, the United Kingdom is account for 77.7% supplies for the world. Because of the high price of pound, this lack of product-market alignment made Massey sensitive to the currency fluctuation, which can be evidenced by the two large amount of exchange adjustment in 1979 and 1980. In contrary, Deere & Co. and International Harvester, the main competitors of Massey, concentrated on the North American market. So Deere and International Harvester did not highly influenced by the currency fluctuation. Therefore, compared with its main competitor, Massy has the higher business risk.
The Massey’s business risk also comes from its strength in negotiating deal directly with government. This strength helped Massey enter into the agreement with Third World and Eastern bloc governments, but it also made Massey expose to the risk of the unstable political climate in some of these counties. For example, some governments who had dealing with the Massey were overthrown. Compared with Massey, Deere and International Harvester did not face such risk because they concentrated on the North American Market.
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And the whole industry was faced with the business risk from market demand. The market demand will change because of a lot of factors, such interest and economic condition. As the recession in 1980, the market demand was severely depressed. Massey, Deere and Harvester were all experience the decreased profit and NI.
The interest rate is another risk faced by the industry. Interest rate affects the industry in two ways. First, high interest rate will increase the cost of short term debt. Second, high interest will depress the demand. Since the short-term debt/ capital ratio of Massey was keeping higher than the Deere and Harvester from 1976 to 1980, the high interest rate would hit Massey harder than its competitor because of the increasing cost of short term debt. So, although the interest rate is the risk for all the players in the industry, the capital structure of Massey made it more risky than its competitor.
Financial Risk:
In 1980, Massey’s inventory is 35% of the assets, and its receivables 34% of the asset. The high inventory is signal of poor operation management, and the high receivables means Massey has the problem on the collection of its receivables. These mean that there is some problem in Massey’s ability to generate operating cash. Based on Massey’s high Debt to Equity ratio (nearly 400% in 1980), Massey would be exposed to high financial risk at the high interest rate because it may have no enough cash to pay debt. That’s one of the reasons why Massey was in financial difficulties in 1980.
Massey raised its debt in its capital structure dramatically in 1970s. And much of the debts are short term. This type of capital structure would have very detrimental implications on Massey. In contrast with its main competitors Deere and Harvester, Massey’s both /capital and STD/capital percentages were consistently higher than these percentages of Deere and Harvester from 1976 to 1980. And the trend seemed to be exacerbated along with the time. The risk of its investment would also be increased with the high leverage. Therefore, when the farm equipment market went into a down time, Massey was put at an unfavorable position.
The Research paper on Case Analysis Massey Ferguson
... 4) Same year Massey lost US. $ 262.2 million, management associated this loss to following reasons: High Interest rates Imposition of ... as to bring in the balance between the equity and debt structure. But under the circumstances bringing in ... of risk on projects, the heavy use of debt financing also restricted Massey Ferguson’s financial flexibility. Massey Ferguson’s debt finance ...
And also the high leverage financing also limited the financing flexibility of Massey, most of Massey’s lenders are independently of one another and spread out among more than 100 banks over nine countries. A lot of these lenders own the covenants with the arrangement that if any single default occurred, substantially all long- and short-term debt will become callable. This type of limitation will impede Massey’s free access to the capital market. Thus, this made Massey have less financial option when they faced with the financial difficulties. This can be evidenced by Massey’s failure to issue new preferred shares in 1980 because it suspended dividend due to covenants on certain U.S. loan.
Summary and Recommendation:
Faced with the business risk and financial risk above, Massey tried a lot of things to alleviate its situation. It cut the labor from 68000 to 47000, reduced its inventories, reduced the capital expenditures (see Exhibit 1), and tried to restructure its liabilities. But all these efforts were not sufficient. Massey was inevitably in a situation of almost insolvent and bankrupt in the end of 1980. The most urgent issue for Massey at this time is to find either new equity financing or other external financing to meet its liabilities and restructure claims, and finally reduce the debt-to-equity ratio.
There are several realistic ways. First, Massey should continue to negotiate with the Canadian government to either get guarantees for its liability or get direct financing from the government. This is very likely to be feasible because Ontario was still conservative, the Ontario provincial election was coming soon and Massey was a large employer. After Massey got the help from the government, it can refinance itself by issuing new equity to reduce its debt-to-equity ratio.
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1) Corporate debt has increased rapidly since World War II. 2) The greater use of debt by corporations since the late 1960s is best shown by the declining interest coverage ratio. 3) The main causes for the increase in corporate debt in America is rapid business expansion, inflationary impacts, and inadequate internally-raised funds. 4) The term debenture refers to long-term, unsecured debt. 5) ...
Second, Massey can try to persuade Argus to use equity finance the company. Argus may be interested as far as price of MF is low enough.
Third, Massey can negotiate with its lender to convert some of the debt to equity, such as the preferred stock.
Massey can try all of these options to solve the immediate crisis, and eventually reduce the high debt-to-equity ratio of Massey through these options. Reduced debt-to-equity ratio can largely decrease the risk faced with Massey and increase its competitiveness, thus, help Massey to survive in the future.
And, among the Massey, Deere and Harvester, Deere was the most stable one. It was the only one who did not experience a loss in the recession in 1980. And Deere and Massey are comparable companies. So Massey might refer to Deere’s capital structure when having no sufficient information about the optimal capital structure in the industry. Thus, Massey can reduce debt-to-equity ratio of Massey to about 66.7%, the Deere’s level.
