In contrast with its competitors, Massey Ferguson chose to finance its expansionary agenda primarily through debt offerings and short term credit lines. This type of structuring had very detrimental implications for Massey Ferguson. The use of so much leverage would increase the risk of the projects they were undertaking beyond the industry standard. Firms in the same industry such as Deere and International Harvester throughout the 1976-1980 period maintained debt/capital and STD/capital percentages consistently lower than Massey Ferguson(a trend that exacerbated as time went on). Therefore if the farm equipment market were to weaken, relatively, Massey Ferguson would find itself in a less favorable position.
Along with the increase of risk on projects, the heavy use of debt financing also restricted Massey Ferguson's financial flexibility. Massey Ferguson's debt finance structure is spread out among 21 different lending institutions in over nine countries. Each one of these lenders having debt covenants of their own with the arrangement that if one of these covenants were to be broken all of Massey Ferguson's debt becomes callable. These types of restrictions can impede company financial options during down times(as they did when Massey Ferguson attempted an equity issuance in 1978). The emphasis on short term credit lines was also a questionable choice of finance structuring. Expansionary/market penetrating strategies typically pan out by taking losses in the short term in order to realize larger gains in the long term. Along with an expansionary strategy, Massey Ferguson was also increasing spending in R&D for production of higher horsepower tractors to market in North America and for diesel engine production in its Perkins Group. Historically R&D expenditures do not realize gains in short term time horizons. This misalignment in cash flow timing most definitely is not optimal for maintaining a healthy capital structure. MF should change its financial...
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