Massey Ferguson Ltd Case Study

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SCHOOL OF BUSINESS AND ECONOMICS

BM6023

MANAGERIAL ACCOUNTING & FINANCE

MAIN CASE:

MASSEY-FERGUSON LTD.

DONE BY:

INTRODUCTION

This case study is about Massey-Ferguson Ltd which is multinational company and their core business is produce farm machinery, industrial machinery, and diesel engines. This company stated their business on 1847. This company had manufacturing and assembly operation in 31 countries throughout the worlds in 1980. Even though this company operates worldwide, they faced financial difficulties especially in outstanding debt. In this paper, we will discuss about its market and financial strategy and comparing it to other competitors, the problems occurred after 1976 and the industrial player’s response to it, about how Massey can resolve financial difficulties and what is options are available for them, and also coming up with the refinancing plan.

QUESTION 1

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

Massey product can be divided into three which is farm equipment, industry machinery and diesel engines. The product market strategy for this company is has good deals with government or public institution in less developed countries. Massey has a market outside North America and Western Europe. Besides that, this company entered into agreement to supply farm equipment or construct manufacturing facilities in many countries. Massey also obtained contract to modernize and expand Poland’s tractor and diesel engine industry. In addition, during 1974, Massey purchases Hanomag which is a West German construction equipment manufacturer. Massey more concentrates in North American market by introducing a new range of 34-81 HP tractors as well as an improved baler line.

        For the financial strategy, Massey finances its company mostly from more than 100 banks from around the world. One of the largest lender for Massey is the Canadian Imperial Bank of Commerce. Debt obtained has contributed to a high growth towards Massey’s company in the 1970s.

        Compared to Massey’s close competitors Deere & Co. and International Harvester, Massey is the third rank in the North America market share farm equipment sales. However Deere & Co. and International Harvesters has the most market share in the said category. Based on exhibit 6, we can compare how total debt over capital of each company in 1976 to show debt finance the company. Massey’s is 46.90%, International Harvester is 43.93% however Deere & Co. has 31.31%. This debt-to-capital ratio shows how each company finance the operations. From the percentage, it shows that Massey has the highest debt-to-capital ratio followed by International Harvester. It means Massey and International Harvester, use high debt in financing its company.  However, Deere & Co. has low debt-to capital ratio which means it uses more equity than debt to finance its company. In terms of coverage, Massey has 2.10 coverage, International Harvester has 3.66 coverage while Deere & Company has 6.15 coverage. This means Massey has the lowest ability to meet its financial obligations towards the lenders compared to its two competitors who has high coverage.

QUESTION 2

What went wrong after 1976? How did Massey and its competitors respond?

On 1978, Massey Ferguson faced a huge loss due to the imposition of credit and monetary restrictions in Argentina and Brazil, causing deterioration in farm machine sales.

        In 1979-1980, the high interest rates caused an increase of cost when there is an excess in inventory and also in cost of short term debt. Furthermore it caused a major decrease for farm and industrial machinery market.

        In 1980, the North American demand deteriorated due to the high interest rate as well with economic recession, grain embargo by the Soviet and weather issue. This also made Massey’s market strategy to penetrate North America to fail. In addition to failure in North America market was because of doubts from the customers and dealers, causing sales to decrease and have bad distribution network. Furthermore with its recession also decrease the European and Third World market.

        The North Sea oil influx in 1980, it caused the British pound to high increase.  Which means, with Massey’s production site and market alignment was not good the cost of goods sold and production increased.  

        Aside from the threat of currency fluctuations, Massey also faced the problem of political changes in the Third World and East Bloc governments such as Iran Pakistan, Libya and Poland.

        Because of all these factors, Massey faced a huge loss in 1978 for over than US$260 million (exhibit 4). This caused Massey to make huge responses to the huge loss by doing the following:

1. Cutting labour force from 68,000 to 47,000
2. Reducing manufacturing space from 30 million sq. ft. to 20 million sq. ft.
3. Reducing inventories from US$1,083.2 million to US$988.9 million.
4. Eliminating unprofitable manufacture operations such as office furniture, garden tractors and construction machinery
5. All causing to close 24 plants

However with its responses, it did not stop Massey from losses. Despite Massey’s responses, its other competitor such as Deere and International Harvester also respond to the problems occurred after 1976. Both increased highly on their short term and long term debt. International Harvester negotiated with banks about a refinancing plan because it was in technical violation of debt covenants. However, based on Exhibit 6, we can see that, Deere & Co. uses this opportunity to increase its equity and along to increase its market share from 44.07% in 1979 to 49.24% in 1980. Perhaps Deere & Co. manage to increase its equity by having high coverage.