Massey Ferguson

Background
Masseys products: farm and industrial machinery, diesel engines
Masseys corporate strategy: goals were growth and world market share.
- Products sold throughout the world including LDCs.
- Production facilities concentrated in Canada and U.K. scale economies, skilled
labor, political risk.
- Sold traditional product in new markets, while lagged in developing new models.
Masseys financial strategy: aggressive capital structure policy - high leverage
- Debt from a fragmented, disorganized lending group cheaper to negotiate.
Financial difficulties in 1980: A loss of $225 million
A preferred share issue postponed indefinitely.
Scheduled principal and interest payments suspended.

What went wrong?

Actually, everything..
1. Low demand: an economic recession came and markets in North America, Europe,
and the Third World markets were severely depressed.
2. Currency risk: lack of product- market alignment.
- The pound rose dramatically, increasing its costs of goods sold.
3. Interest rate risk: high interest rates in the late 1970s - most responsible
- A doubly negative impact on the industry
1) High interest rates reduced sales significantly.
2) High rates raised manufacturers costs.

How did Masseys financial policy compare to competitors?

1976
(ST debt + LT debt)/ equity - Massey 88%
(ST debt + LT debt)/equity - Harvester 78%
(ST debt + LT debt)/ equity - Deere
46%

(ST debt/ LT debt) - Massey

(ST debt/ LT debt) - Harvester
(ST debt/ LT debt) - Deere

1976
34%
33%
27%

1977
101%
70%
46%

1978
182%
70%
44%

1979
181%
63%
42%

1977
74%
32%
50%

1978
94%
41%
22%

1979
119%
47%
33%

What happened to Massey-Ferguson?

Bank borrowings:
1971- $168 million
1972- $139 million
1973- $81 million
1974- $163 million
1975- $170 million

1976- $113 million

1977- $249 million
1978- $362 million
1979- $512 million
1980- $1,015 million

Why the increased borrowing? - Income was down.

Receivables way up: 20.1% of sales in 1976
30.9% of sales in 1980

Why didnt they issue equity during 1978-1980 when things were going downhill?

Competitive developments
International Harvester (IH)
Basically a disaster just like Massey-Ferguson
- The North American farm equipment market collapsed in 1980
- A costly labor strike in 1980
Deere
Huge increases in sales from 1976-1980, market share from 38% to 49%.
Massive capital expenditures: built new automated plants to lower its costs.

Massey
Harvester
Deere

1977
147
164
233

1978
99
210
228

1979
77
285
266

1980
46
384
421

Questions
How did Deere respond to its competitors weaknesses?

How did Deere finance its expansion?

Were they in danger of also becoming too leveraged?

What should Massey-Ferguson do now?

Three options to consider.
1.

Attempt to attract acquisition offer

2.

Liquidation of Massey-Fergusons assets

3.

Refinancing

A remaining problem:
Massey needs additional financing to restructure operations. Must find interested
parties to help it out. Candidates are labor, governments, suppliers..
Why would the Canadian government help out?

What happened?
Massey did refinance, 81% of the equity given to lenders.
Debt was exchanged for long-term debt and preferred stock
$450 million in government guaranteed preferred stock was issued

Massey had to refinance again in 1983 and 1986

Foreign competitors took much of their third-world business
Changes name to Varity Corporation
Profitable in 1988, was seeking unrelated acquisitions

The costs of having too much debt

The true cost of an inappropriate financial policy is far greater than higher interest
costs and bankruptcy reorganization costs.