Advanced Corporate Finance
Massey Ferguson is a multinational producer of farm machinery, industrial machinery and diesel engines. The company was formed through a merger between Massey-Harris and Harry Fergusson in 1953. They combined their skills to become the West’s largest producer of farm tractors and the world’s largest supplier of diesel engines to original equipment manufacturers.
Massey’s farm machinery line consists of tractors, several harvesters and other agricultural equipment. The industrial machinery line consists mostly of several industrial tractors. Diesel engines were produced in Coventry, England by the Perkins Engines group. Perkins engines were used in Massey-Ferguson’s equipment. Massey had run third in the worldwide sales of farm equipment in the large North American farm equipment market. Massey-Ferguson was well-known for not only be in markets inside North-America and Western Europe, but also dealing with governments and public institutions in less-developed countries.
However in 1978 Massey-Ferguson went downhill. They reported an unpredicted loss. The board of directors assigned a new president to the company to restore the profitability. In 1979 Massey-Ferguson showed a profit but earnings were still disappointing. Hence, the company was in financial distress and facing to be in default on several loan covenants.
This report provides an analysis on the Massey-Ferguson financial situation of 1980, starting with an explanation of how Massey got into troubles from 1976-1980. This is done by making a comparison between Massey and it’s two biggest competitors in farm equipment and analyze what impact different financial decisions might have had. Comparison with competitors
Thereafter this report comes up with a advice of how Massey’s management should restructure(refinance) it’s company to get positive earnings. This advice takes various interested stakeholders into account, including shareholders, creditors and governments.
Massey Ferguson’s key competitors in the large North American farm equipment market are Deere & Co and International Harvester. International Harvester was formed in 1902, by a merge of the McCormick Harvesting Machine Company and Deering Harvester Company, along with three smaller agricultural equipment firms. Deere & Company began in 1804, when John Deere opened a small store for tools like pitchforks and shovels. Even though all three had roughly equal shares of the market, sales and operating profit were much lower for Massey Ferguson over the period 1979 to 1980 (Exhibit 1). The operating margin (Operating profit / Sales) was also much lower during this period. While in 1979 International Harvester and Deere & Company had an operating margin of 9,15% and 12,92% respectively, Massey Ferguson’s operating margin was -4,55%. So on each dollar of sales, Massey Ferguson made a loss of 0,0455 dollar, while competitors made a profit of respectively 0,0915 dollar and 0,1292 dollar. In comparison to his competitors, Massey Ferguson’s operating performance wasn’t very good. Financially it wasn’t much better. Massey’s net income during the period 1976 to 1980 went from 188 million to 33 million and far below 0. The only reason for a positive net income in 1976 was a result of an extraordinary item reflecting the recovery of previous years' taxes. Meanwhile, Massey’s competitors, Harvester and Deere, had a positive net income. In some years even over 300 million dollars.
Another remarkable issue was how Massey’s was financed. In 1979, Massey’s debt-value ratio was just a little higher then Harvester’s ratio. But from 1977 till 1980, Massey’s debt-value ratio became twice as high. In this period, the ratio’s of Harvester and Deere also grew, but they didn’t became that high. The same is the case for the short-term debt-value ratio. In 1980 this ratio was 58,33% for Massey, while the ratio’s for Harvester and Deere...