Case Study of Massey Ferguson

Assess the product market strategy and financial strategy Massey pursued through 1976. Compare Massey strategy with those of Its leading competitors.

Massey market strategy

• Sales of durable products -In contrast to the competitors, focus on markets outside North America, emerging markets in particular.
• Success In dealing with governments and public Institutions in developing countries
• But manufacturing

In developed countries Massey D/(Total capital) = 47%, Deer’s D/(Total capital) = 31 3%

Massey coverage = 2. 10, Deer’s coverage = 6. 15 -Massey lenders: large, disorganized group (1 50 lenders from many countries) -Hence, Massey pursued risky product-market strategy + aggressive financial policy

Massey Leading Competitors

I) Deere -Deere saw the opportunity and decided to use It Deere balanced its expansion with debt, mostly short-term.

By 1980 debt ratio was let 21% snort-term EOT. -Deer’s response to high leverage: issue equity. It reduced Deer’s stock price but brought down leverage to 33%

Question 2 What went wrong after 1976? How did Massey and its competitor respond? What went wrong after 1976?

• Rise in interest rates. Double impact:

a) Demand Tort machines Tell as customers anemia to Tolerance purchases

b) Cost of short-term debt for Massey rose DAY Drowning

• Credit and monetary restrictions in Argentina and Brazil (1 1.

  % of sales)

• Weather
• Soviet grain embargo
• reduction in demand for Massey products
• Appreciation of British pound: costs of production in the UK increased
• Political changes in Third World countries
• Failure to strengthen positions in the North American market Massey response to troubles
• Cut labor force
• Cut manufacturing space
• Reduce inventories
• Close unprofitable operations
• But these measures did not help to stop losing cash:

?) Receivables increased as financially weak customers could not pay

d) Hanging operations

Walt n snort term e EAI to growing Interest payments

• SST,TOGO capital rose from 1976 to 1980
• In 1980 the net loss was $225 million, while interest expenses were $300 million
• -Debt overhang problem. Hence neither equity nor long term debt finance is feasible or are very expensive

Covenants restricted issuing new securities Massey

Competitor

• How did Deere do?
• Deere saw the opportunity and decided to use it
• The whole industry was depressed, but Deere had low leverage!

Hence, Deere could use its financial flexibility to build capacity and increase its market share in bad times:

1. Cape share rose from $126 million in 1976 to $421 million in 1980
2. Market share rose from 38% to 49% Deere financed its expansion with debt, mostly short-term. By 1980 debt ratio was 40%, with 21% short-term debt.

Quietest s Massey s difficulties

Current Lenders’ situation

• At the beginning of the fiscal year 1981 the company presents outstanding debts for 2.5 bal IIS$.

  The short term debt accounts for 43% of the total amount. In 1980 the DIE ratio is 214%, which is relevantly above the average level of the competitors. It is thus evident that our position as lenders results particularly risky since the company won’t be able to repay the debt due by the 1st November. Indeed, the growth of the company was massively financed by short term debt, whose impact in terms of the interest rate expenses deteriorated the credit-worthiness of the company.

• The interest expenses are, indeed, 10% of the total ones and the percentage is expected to increase reaching 300 million IIS$ in 1980 with a growth rate of 125% .
• As a result of this financing strategy the company would unlikely have sufficient financial resources to cover both the short and the long positions.

  Our lack of trust towards the company is confirmed by the behavior of the shareholders who seems to eave lost their confidence because of the critical situation of Massey and of the general economic environment. One evidence of it is that that the Argus Corporation, the largest shareholder, lost interest in further investing in Massey and postponed the issue of preferred stocks. Massey needs extra investment to improve the operation and financial difficulties, wanly Is tout AS In teen next Tell years Wendell It lost Its major source AT equity funding. So as lenders, our choice is critical for the future survival of the firm. Alternatives to face Massey alleviate its financial problems . Claim the debt

• As long as the company will be in default on several loans on November 1, lenders will be able to use the Cross-default provision, which allows them to cut off credit and secure their loans.

  As a consequence, the firm will be obliged to stop its activity and start the pay-off phase, implying assets sale and massive worker layoffs.

• Pursuing this alternative would mean minimizing the risks assumed by the lenders, ensuring them a partial return on their loans and would also represent a way out from an unhealthy company. However, they would report a loss deriving from the account on receivables before maturity, on the non-current assets sale in order to obtain liquidity in the short term and on the inventory dismissal. Indeed, this amounts discounted plus the cash currently held does not cover the 2. bal IIS$ of outstanding debt reported at the beginning of the fiscal year 1981.

Dupont Analysis

a. Comparison with competitors ROE = Profit Margin

• Total asset turnover
• Equity Multiplier

b. Equity Issue

• The company could improve its DIE ratio by issuing new shares and raising money n the capital market. The funds raised could be used to cover the short-term debt while the higher equity level would reduce the risk exposure for the portion of the debt still due.
• Given the current market price of 5 IIS$ per share and assuming as fair an under- pricing of 20% the price of the issue should be 4 IIS$ per share.

  To cover the short term debt of 1.075 bal US$, 268.75 millions of shares should be issued. This option seems unfeasible for two main reasons: current shareholders would never accept such a dilution on their voting power and the market would be unwilling to finance such an indebted company

c. Dent conversion

Into equally

– The lenders evaluated the hypothesis of converting part of the debt into equity to alleviate the financial leverage of the company but this option seems not convenient for the following reasons. We don’t have any strategic interest and competence in the industry in which Massey operates and consequently the cost of information asymmetry and monitoring would be too high.

Moreover, since the probability of default is and will likely be very high, becoming shareholders would mean losing the priority in the pay-off phase.

Government intervention

The Canadian Government has a strong incentive in implementing a rescue policy in favor of Massey. Indeed, a massive reallocation of facilities in Canada has been planned and a halt of Mackey’s activity would imply a relevant loss in term of employment. The Government intervention would reduce the default risk of the company and guarantee our position. Since public equity participation is not in line with the Government intentions, the only viable solution would be a long-term loan provided by the Government at a preferred interest rate.

This loan should cover the short term debt, alleviate the pressure of interest expenses on the total cost structure and finance the recovery plan, guaranteeing the company’s solvency in the long term.

Question 4 As a financial adviser to Massey management, what refinancing plan would you propose?

Refinancing plan for Mackey’s

– Massey can Invite teen creator to Invest In teen company Ana promise Tanat teen would get the liquidation, otherwise they won’t be agreeing.

The creditor can be as follow: Shareholders Creditors Workers Governments Management Refinancing idea as follow:

• Suspend interest payments, extend debt maturities -In exchange, give creditors some long-term securities
• Raise $500 million for restructuring
• Use governments. They have workers’ Jobs at stake

Question 5 Why, fundamentally, did Massey get into financial trouble? What alternative actions by management would have reduced the severity of Massey financial difficulties?

Massey fundamentally get into financial trouble due to: The Massey financial strategy used as below: -Financing growth by debt in 1976:

a) Massey D/ (Total capital) = 47%, Deer’s D/ (Total capital) = 31 -Massey lenders: large, Loggerheads group (1 50 lenders Trot many countries)

The Massey business risks also lead to the financial difficulties:

• Interest rate risk -Political risks
• Economic instability of emerging markets
• Exchange rate risk
• Weather/energy/commodity prices