Massey-Ferguson, 1980

Gregory Francis Maldonado Gordillo 153244

1. INTRODUCTION

Massey Ferguson was a leader in farm equipment production in the world.

By 1980 it had a world-renowned status, and it sold to many countries all around the
world.
Their key products were farm equipment, industrial machinery and diesel engines.
In 1978 their situation worsened, and Massey Ferguson experienced severe financial
losses as they reported an unprecedented year-loss of $262.2 Million.
The company, took several measures to dampen their losses such as cutting its labor
force, reduce inventories, and elimination of unprofitable operations. Nevertheless,
the restructure was not sufficient, and they had to postpone a preferred share issue
in 1980 (vote of confidence).
Their situation seemed worsened also due to the fact of several economic factor as
well as outstanding debts. Yet the question arose whether Massey would be able to
satisfy their obligations to lenders, as well as protecting their shareholders and
employees interests.
2. ANALYSIS
During previous years Massey was aggressively expanding its operations
and building assets, but most of it was financed by short term debt.
If we compare strategy with other competitors, we see that Massey Ferguson was
involved in a sector that included large multinational companies with full product
lines, and medium and small enterprises with a restricted range of products.
To its more direct competitors Deere & Co. and International Harvester, they ranked
third in sales of farm equipment.
It is important to highlight how Massey Ferguson was the company with the highest
difficulty to translate sales into net Income since 1976 Massey underperforms to its
competitors. Moreover, this performance be a result of Massey Ferguson high debt.
They financed themselves primarily through debt offerings and short term lines.
Firms in the same industry, Deere and International Harvester, throughout 19761980 maintained Debt to Capital and Short-Term-Debt to Capital percentages lower
than Massey. Therefore, Massey would start to struggle with payment of their debt
and interests.
Along with an increase of risk on their projects, the use of a large debt financing
restricted Massey Fergusons financial flexibility. Firstly, payment on preferred
dividends had to be suspended after they announced losses, therefore they would
not be able to issue their planned preferred shares. Secondly, Cross default
provisions would make all outstanding loans callable if they were to default on one.
To continue the analysis, it is important to highlight the factors that led to Massey
current situation in 1980.
Internally, the company made many acquisitions in various countries. This rapid
growth allowed less room for improvement on existing operations, as already seen
the Return on Assets by Massey is well below its competitors and continued

worsening as their problems grew. It seems priority was given to expansion rather
than a proper framework of operation.
Additionally, their working capital would increase substantially due to accounts
receivable, a non-earning asset. But most importantly, Massey Ferguson suffered
from a misaligned product market, as they produced mainly in Great Britain but
sold to less developed countries. This created two adverse effects, firstly their cost
was higher, and secondly due to their concentrated production they were highly
dependent on the exchange rate.
On the other side, the company would also face several external factors.
Various economies were hit by high inflation, and especially the US Market
suffered. The US also suffered from a Soviet embargo and high interest rates.
Massey Fergusson was currently trying to effectively enter the North American
Market, and was highly affected by these circumstances. Considering that North
America represented 35.5% of total sales and was thus their biggest contributor, we
can dimension the high impact this had on Massey Fergusson.
Massey Ferguson was also very susceptible to political climate, especially in less
developed countries where Massey had success in dealing with government.
Political instability could put under risk already existing contracts.
Lastly, but most importantly for the financial situation of Massey it was the high
interest rate that Massey had for their debt. Consequentially the cost of short term
debt would rise, and secondly it would depress interest rates for farm and industrial
machinery.
It is evident that Masseys position is highly critical as they face an outstanding debt
of $2.5billion and their operations are not as profitable b, therefore the question
arises of whether they will be able to repay both the short and long positions. The
interest expenses are 10% of the total expense and 23% of their funds is used to
reduce long-term debt. Both numbers are expected to rise.
Massey had to take several actions after reporting the year- end loss of U.S. $2602
million. The actions include cutting around 31% of their total labor force, an 8%
reduction in inventories and a divestment program that resulted in the sale of more
than U.S. 300 million. Despite these efforts Massey continued to show loss on
continuing operations and discontinued operations.
If we compare Massey to its competitors, all of them showed increasing sales.
Nevertheless, Deere did not suffer as Massey did, due the fact they show a positive
but not necessarily decreasing net Income in the last few years. They also show
increasing investments on assets, mostly financed by long-term debt and short-term
debt. Therefore, they were not as exposed to debt as Massey and could continue
with projects without facing major setbacks.
3. ALTERNATIVES TO FACE MASSEYS DIFFICULTIES
3.1 Liquidation

This alternative would see shareholders interests highly affected, as they could
lose most of their investment. But pursuing this alternative would minimize
risks assumed by the creditors but it will also deprive them of making a full
recovery. The amount in inventories and receivables plus cash would not suffice
to repay.
Massey biggest disadvantage is their high debt compared to others in the same
industry.
3.2 Restructuring
This could see the company improve their D/E ratio by issuing new shares and
raising money. The raised capital would be used to cover the short-term debt
while also using the higher equity level to reduce the risk exposure to long-term
debt.
This option would be very difficult to implement due to shareholders dilution
of shares and due to the unwillingness to finance such a company.
Other option could be to convert debt into equity but default seems likely and
lenders would increase their risk as they move down the payment line.
3.3 Government Intervention
The Canadian government has made various efforts to rescue the company to
avoid further job cuts and the investment already made in Canada. Both the
government of Britain and Canada have strong incentives to implement a rescue
policy.
The intervention of any of them would reduce the risk of default and help the
company gain more financial flexibility.
The most important factor is the terms under which the government would
accept bailing rescue Massey.
The most feasible option would be through a long-term debt provided by the
government with a preferred interest, as a high interest would only hinder future
repayments. The loan should cover the short-term debt and guarantee the
companys solvency in the long run.
4. CONCLUSION AND SOLUTION
Massey situation is very difficult as many interests play a role in their situation.
They seemed grid-locked both through a high debt with their various covenants and
trough shareholder who gain positions to elect members of the board of directors in
the case that Massey stops paying dividends for eight quarters.
Massey initiated with a very aggressive growth plan and failed to match their
returns with their payments, and failed to correctly asses the risks involved
correctly.
For all the alternatives, there are various parties whose interests should be set aside
for the company to successfully carry on, without having to declare default. This
alternative seems like the worst one since no one would recover their investment.
I would choose the option of government intervention; among the scenarios this
seems preferable in the lenders interest because they would have the government as
a counterpart. The long-term debt at a preferred interest has the potential to benefit

the current problems and could ensure that the interests of employees are
considered.