Massey-Ferguson

Massey-Ferguson, 1980

Scott McArthur, Liz Ugarph, Sarah Vick, Cheng Chen

Massey was a manufacturer of agricultural equipment. The firm’s main competitors were International Harvester and John Deere.

Product Market Strategy and Financial Strategy

Massey’s product market strategy is to produce small tractors and sell them to countries with small farms. Unlike its competitors which targeted the large, high-end North American market, Massey focused on small tractors and combines. The firm manufactured the tractors in Canada and the UK but sold throughout the world, especially less-developed

countries.

In Massey, sales are growing at an average 22% a year, but ROE is an average of 12.8%, so it has to finance the difference to maintain its growth. Massey opted to an aggressive financial strategy with debt. As shown in the table below, Massey’s debt ratio is much higher than its competitors. Its coverage was also very poor. (Harvester had a lower coverage, and no wonder it went bankrupted in a few years.)

What Went Wrong

After 1976, Massey’s sales and financial performance declined dramatically. The main factors affected demand for farm equipment leading to a decline in Massey’s worldwide decline are: 1. Latin America experienced monetary restriction; 2. Europe experienced bad weather; 3. the United States imposed a grain embargo on farm shipments to the Soviet Union; 4. North America suffered a recession; 5. Global interest rates increased at the same time; 6. British pound became more expensive; 7. Political changes in some of the countries Massey sold to.

Massey’s Response

In response to all this, Massey cut back their work force by a third; they closed plants; they sold assets; they lowered inventory; and they cut their dividends. Despite all this effort, total assets to sales barely changes as receivables went up significantly because Massey’s customers were unable to pay. As a result, Massey was posting losses. Interestingly, Massey’s loss in 1980 was $225 million, while its interest costs were $301 million. In other words, Massey would have made a profit if it had no debt.

Alternatives to Massey’s Difficulties

Massey could find a merger partner. But because of the amount of debt Massey had, it was nearly impossible to find a buyer.

Massey could sell its diesel engine manufacturing facility, Perkins. But this is rarely a viable option since Massey’s lenders were never going to let Massey do this unless they get completely paid off.

Massey could sell off everything else. But Massey’s main asset other than Perkins, was their receivables, and those receivables were potentially worth next to nothing because they were difficult, if not impossible to collect.

Massey could try to renegotiate with their lenders, the banks. But Massey had borrowed money from 250 banks in 31 countries, each of which can individually took Massey into bankruptcy if they were not repaid or restructured.

Massey could seek for a government bailout. Massey actually did this and got it from Canada.

What would you do now

As Massey’s management, I would seek for a government bailout from Canada. It seemed to be the only option at that time as discussed above.

As Massey’s lenders, the banks, I would try to help Massey restructure and convert short-term debt to long-term debt or stock. Currently, Massey’s short-term debt really worth nothing because there was no way Massey could repay anything in the short-term. However, Massey still had the potential in the long-term after the current recession.