Massey Ferguson

Background

Massey’s products: farm and industrial machinery, diesel engines

Massey’s 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.

Massey’s 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 1970’s - most responsible

- A doubly negative impact on the industry

1) High interest rates reduced sales significantly.

2) High rates raised manufacturers’ costs.

How did Massey’s financial policy compare to competitors?

1976 1977 1978 1979

(ST debt + LT debt)/ equity - Massey 88% 101% 182% 181%

(ST debt + LT debt)/equity - Harvester 78% 70% 70% 63%

(ST debt + LT debt)/ equity - Deere 46% 46% 44% 42%

1976 1977 1978 1979

(ST debt/ LT debt) - Massey 34% 74% 94% 119%

(ST debt/ LT debt) - Harvester 33% 32% 41% 47%

(ST debt/ LT debt) - Deere 27% 50% 22% 33%

What happened to Massey-Ferguson?

Bank borrowings:

1971- $168 million 1976- $113 million

1972- $139 million 1977- $249 million

1973- $81 million 1978- $362 million

1974- $163 million 1979- $512 million

1975- $170 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 didn’t 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.

1977 1978 1979 1980

Massey 147 99 77 46

Harvester 164 210 285 384

Deere 233 228 266 421

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-Ferguson’s 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.