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College of Business
Financial Management FNC535M
DLSU Taft Rm. 218

MASSEY-FERGUSON LTD.
Case Analysis & Corporate Strategy

Submitted by:
Jerelynn B. Hipolito

Dean Atty. Joe-Santos BalagtasBisquera

MBA Professor

Jerelynn B. Hipolito

Massey-Ferguson Ltd.

November 26, 2015

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Case Analysis
Executive Summary
Founded in 1847, Massey Ferguson (MF) in Newcastle, Ontario by Daniel
Massey, a division of Argus Corporation, is one of the leaders in farm
equipment production in the world. In 1953, MF merged with the Ferguson
Company, the former UK farm equipment producer, to become MasseyHarris-Ferguson, before finally taking on its current name in 1958. By 1980
it had manufacturing and assembling facilities in 31 countries and its
products were sold in 140 countries. Main products are tractors, diesel
engines and industrial machinery.
The company began making some of the world's first mechanical threshers,
first by assembling parts from the United States and eventually designing
and building their own equipment. The firm was taken over and expanded
by Daniel's eldest son Hart Massey who renamed it the Massey
Manufacturing Co. and in 1879 moved the company to Toronto where it
soon became one of the city's leading employers. The massive collection of
factories, consisting of a 4.4 hectares (11 acres) site with plant and head
office at 915 King Street West, became one of the best known features of
the city. Massey expanded the company and began to sell its products
internationally. Through extensive advertising campaigns he made it one of
the most well-known brands in Canada. A labor shortage throughout the
country also helped to make the firm's mechanized equipment very
attractive.
In 1891, Massey Manufacturing merged with A. Harris, Son & Co. Ltd to
become Massey-Harris Company Limited and became the largest
agricultural equipment maker in the British Empire.

The company made threshing machines and reapers as well as safety

bicycles, introducing a shaft-driven model in 1898. [3]In 1910, the company
acquired the Johnston Harvester Company located in Batavia, New York,
making it one of Canada's first multinational firms.

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Massey-Ferguson Ltd.

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Massey-Harris built
early tractor
models including the 20
horsepower Massey-Harris GP 15/22 (193036), 25 horsepower MasseyHarris
Pacemaker (193639), 35
horsepower Model
101 (1938
42), Massey-Harris Pony, Model 20, Model 81, and Model 744.
Massey-Harris revolutionized grain harvesting in 1938 with the world's first
self-propelled combine the No. 20. Unfortunately, it was too heavy and
expensive for extensive mass production. However, it served as a guide for
the building of the lighter and less costly No. 21, which was tested in 1940
and put on sale in 1941. The Massey-Harris No. 21 Combine was
commemorated with a Canada Post stamp on June 8, 1996.
In 1953, the company merged with the Ferguson Company to
become Massey-Harris-Ferguson, before finally taking on its current name
in 1958. The company shortened the name to Massey Ferguson in 1958,
and tried to consolidate the two dealer networks and product lines. Its
television and radio advertising featured an upbeat jingle, with a male
chorus singing, "He's a get-up-early, keep-'em-rollin', Massey-Ferguson
kind of a man." But the company soon began to decline financially. Facing
increasing international competition in the 1960s the firm began to struggle.
In the 1970s, Conrad Black, whose family had purchased control of Massey
Ferguson's parent company, Argus Corporation, became active in Massey
Ferguson's management. Under Black's leadership, Massey Ferguson
instituted significant cost-cutting programs that returned the company to
profitability. During the late 1970s, production was relocated to a new large
facility in Brantford, Ontario. In 1978 Massey Ferguson was the first to
introduce an electronic control system for the three-point hitch on a tractor.
In 1973, Massey purchased the German company Eichers, and many
Massey-licensed Eichers were built. They later sold their interest, and
Dromson now owns the company. They now build specialized tractors for
vineyards and such.

Jerelynn B. Hipolito

Massey-Ferguson Ltd.

November 26, 2015

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However, a world-wide decline in the agricultural equipment market

combined with high inflation, high domestic interest rates and a major
recession, caused Massey Ferguson to slip into a loss once again. In
October 1980, Argus donated its shares in Massey Ferguson to the
employee's pension plans, leading the way to a $250 million bail-out from
the Government of Canada and the Province of Ontario for the collapsing
company which later renamed itself Varity Corporation. In the mid-1980s,
Varity spun off several money-losing divisions into an entity called Massey
Combines Corporation in 1985. Massey Combines Corporation was
headquartered in Brantford, Ontario and became insolvent on March 4,
1988, and its assets were re-acquired by Massey Ferguson.

Problem
Institutional
In late 1970s Massey Ferguson experienced severe financial losses and in
fact reported an unprecedented year-end loss of 262 million USD in 1978.
To identify the problems the company was faced with and divided them into
two groups: internal factors or firm specific and external factors, or marketwide.
Operational
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 shortterm debt, its financing cost went up dramatically.
Specific problems:

Jerelynn B. Hipolito

Massey-Ferguson Ltd.

November 26, 2015

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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).

Corporate Objective
The objective of the case is to find a way to Massey-Fergusons survival
and to regain its status as a self-sufficient corporation.
*To maximize the companys profitability.
*To minimize their loss so they can surpass the financial problem they
are going through.
Areas of Consideration
Environmental Opportunities & Threats
Macro-Economic Indicators
Political
Despite MF was successful in negotiating with less developed
countries and the Eastern European governments, the company was still
susceptible to unstable political conditions in those countries. For example,
the 1979 Iranian revolution, or Pakistans regional problems in 1970s.
A policy of multiculturalism was officially adopted by the federal
government.
In the 21st century, historians have increasingly portrayed the 1970s
as a "pivot of change" in world history focusing especially on the economic
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Massey-Ferguson Ltd.

November 26, 2015

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upheavals. In the Western world, social progressive values that began in

the 1960s, such as increasing political awareness and political and
economic liberty of women, continued to grow. In the United Kingdom,
the1979 elections resulted in the victory of its Conservative Party Margaret
Thatcher, the first and to date only female British Prime Minister.
She and the Conservative party rise to power in the United Kingdom
in 1979, initiating a neoliberal economic policy of reducing government
spending, weakening the power of trade unions, and promoting economic
and trade liberalization.
During this time Mr. Rice, together with Mr. Black, has been trying to
convince the governments of Canada, Ontario, and the United Kingdom to
intervene on Masseys financial difficulties in their behalf. Unfortunately,
both Canada and the United Kingdom had strong resistance to bailing out
privately owned multinationals.
This is a problem that Massey is pushing to solve. He eagerly wants
to have the governments support so that they can stand up again from
their financial debts and responsibilities.
Economic
MF's renewed drive into the North American market in the late 1970s
regrettably happened in line with the aggregate demand fall in the U.S.
economy as the country was entering deep recession. The U.S. GDP in
1980 and 1982 stood at just below zero growth and far below at -4%
respectively. Private consumption also fell considerably.
Low demand - The above-mentioned contractionary 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 coincided
with the slow down in US demand. The company's efforts to penetrate the
North American market thus remained unsuccessful.
With the enlarged production of the North Sea oil in the late 1970s
the UK pound sterling appreciated significantly against the other major
currencies including the currencies in which Massey Ferguson traded its
products
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The company has made many acquisitions in different countries

without taking time to stand firmly in terms of marketing decisions,
procedures, etc. It seems that the priority was given to expansion
strategic decisions without implementation of a proper operational
framework.
There was a worldwide recession during 1973-1975 also known as
the 1970s recession. It was a period of economic stagnation in much of
the Western world during the 1970s, putting an end to the general postWorld War II economic boom.
Though the recession ended in March 1975, the unemployment rate
did not peak for several months. In May 1975, the rate reached its height
for the cycle of 9 percent. (Three cycles have higher peaks than this,
the late 2000s recession, where the unemployment rate peaked at 10
percent in October 2009 in the United States, the Early 1980s
recession where unemployment peaked at 10.8% in November and
December 1982, and the Great Depression, where unemployment peaked
at 25% in 1933.)
The high interest rates during those times had a doubly negative
effect on Masseys performance. First, the cost of Masseys short-term debt
rose dramatically. Second, high interest rates depressed markets for farm
and industrial machinery and thus hurt company sales.

Demographic
In June-September 1980 anomalous heat and drought covered vast
territories of the USA. Total deaths amounted 10,000 people. Agriculture
and related industries were estimated to have lost $20.00 billion. Masseys
farm equipment production was in rough regional alignment with its sales.
At the margin North America and the United Kingdom were net suppliers to
the rest of the world. Engine production, however, was heavily
concentrated in the United Kingdom. In 1980, with the influx of North Sea
oil, the pound rose dramatically relative to currencies in which Massey sold

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its product. The high price of the pound increased Masseys cost of goods
sold, reducing margins and thus hurting the competitiveness of Masseys
products.
Lack of alignment between production sites and markets meant that
currency fluctuations were a recurring problem for Massey-Ferguson.
Massey-Fergusons product-market alignment would continue to have an
unfavorable impact on profits as long as the British pound was strong and
the companys operations concentrated in the United Kingdom.
One possibility discussed within Massey was to relocate capacity at
the margin in Canada. Concentration of assets in Canada would bring the
company closer to North American markets and make its costs similar to
those of Deere and Harvester. Massey already had two large Canadian
facilities, forming a base on which it could expand.

Market Profile & Outlook

Competition
Masseys competition in farm and industrial machinery included both
large multinational companies with full product lines and medium to
small companies conducting business locally with a limited range of
products. In the large North American farm equipment market,
Massey had traditionally ranked third in sales of farm equipment
behind Deere & Co. and International Harvester. However, in 1980, it
held first or second position in markets for small tractors and combine
harvesters.
Resources
Corporate Franchise

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According to the law dictionary, corporate franchise is the right to

exist and do business as a corporation. Massey-Ferguson is a
corporation that has been in the industry for several years already
and can be inferred that they are given the right by the government to
do business.
Shareholders & Key Officers
Conrad Black, son of one of the founders of Argus, took over as
president of Argus, and as a result, became chairman of the board of
Massey-Ferguson. Black picked Victor Rice to succeed Albert
Thornburgh as Masseys president.
As of late fiscal 1980, Massey-Ferguson had total debt of US $1.6
billion outstanding with more than 100 banks around the world.
Marketing Profile
Product
Not only MF suffered from imbalanced capital structure but also from
misaligned product market. It produced machines in highly developed
countries and sold them in less developed states.

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Price
Interest rate might affect the price of the product of MasseyFerguson. The US economy and other major economies were hit by
high inflation in 1974/75 and 1979/80 (see Figure 10). The majority of
economists state that the 1973/74 and1979/80 oil crises were the
main cause of the economic downturn. However, others view the
roots of that economic hardship in excessive global liquidity. In
particular, after the demise of the Bretton Woods System in 1971 the
Japanese and European central banks intervened heavily to prop up
the dollar and greatly boosted money supply. Nevertheless, OPEC oil
price hike was indeed evident. To contain the high inflation Paul
Volcker, the chairman of the Fed, tightened the Fed funds rate by
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increasing it from 11% in 1979 to 20.5% by January 1981. Massey

Ferguson was hit hard since its operations were mainly financed by
short- term debt, thus its financing costs went up dramatically.
Place & Distribution
Massey-Ferguson, having been called the true multinational, really
lives up to it since they have various locations when it comes to their
production facilities. They have facilities based in the following
locations:
1980 Sales per Region

Promotion and Advertising

No specific information were stated in the case but in 1978 53%
of the total operating expenses, amounting to USD 372
(million) were used in marketing, general and administrative
expenses. In 1979 53% of the total operating expenses,
amounting to USD 352 (million) were used in marketing,
general and administrative expenses. In 1980, 53% of the total
operating expenses, amounting to USD 404 (million) were
used in marketing, general and administrative expenses.
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Thus, we can assume that the company puts a big percentage

to the marketing and advertising.
Financial Profile
Working Capital
MF adopted an aggressive financing strategy. The expensive short term
financing was utilized to finance non-earning assets: inventories and
accounts receivables. Later, in 1980, the company started to offer a hire
purchase contract to its customers, rather than facilitating bank loans for
them.

Profitability

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Turnovers

Capacity Utilization
Capacity utilization rate is defined as the metric which is used to
compute the rate at which probable output levels are being met or
used by Ready Ratios. But there is no sufficient data included in the
case that explains the capacity utilization of Masseys employees. But
in between 1978 and 1980, Massey reacted to their loss by cutting its
labor force from 68,000 to 47,000.
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Massey-Ferguson Ltd.

November 26, 2015

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Financial Leverage

The company was highly leveraged compared to its peers. MF s high

dependence on short-term debt played its significant role in the
companys severe financial distress leading it to default in early 1981
as the company was unable to meet its short run obligations. The
company attempted to issue preferred stocks in April 1980; however
its major stakeholder AGCO blocked the decision. On the whole, MF
could not issue equity and, thus, obtain long term capital. Therefore, it
had to depend on short-term debt.
Present Competitive Advantage
SWOT
Conclusion & Strategic Decision
Massey- Ferguson biggest reason for drop in income of 1980 was the cost
of goods sold. It accounted for $2,568 (U.S. $millions) of cost and
expenses on the income statement. The reason for this high cost of goods
sold is because of the decline in value of the U.S. dollar in relation to other
countries in which the firm was operating in. For instance a good majority of
their product was made in England at a time when the pound was at an alltime high which made the cost of selling the good in the U.S. dollar
extremely expensive to American firms. Also their operations in Germany
were halted because they German mark was appreciating in value at the
same time the United States dollar was depreciating which made it too hard
to sell the products for Massey- Ferguson at a profit.
Massey- Ferguson market value of common stock at the end of the fiscal
year of 1980 was 176.9 million dollars. This number was much lower than
its book value of equity because the market was unsure of the companys
ability to pay back its short and long term debt causing a plunge in its
market value. The debt was being used to expand its operations before
1980 and because of this the book value of equity in the company was high
because they had a lot of assets that they had purchased in the companys
growth period.

Jerelynn B. Hipolito

Massey-Ferguson Ltd.

November 26, 2015

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The Canadian government had a big incentive in helping to refinance

Massey- Ferguson Company. They wanted to keep them operating in
Canada because they provided a lot of jobs to Canada and because it was
politically convenient because an election was about to take place. Another
big reason was because Argus Company was invested in Massey
Ferguson and if they had to provide more cash for Massey- Ferguson to
not go under they may scale back some of their growth and possibly lay
people off or pursue other opportunities elsewhere so that cost of making
their products is even lower than Canada.
Attachments

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