Massey Ferguson

1) Describe very briefly the industry in which Massey operates, and what you think the
key factors are to be successful.

- Massey-Ferguson is a multinational producer focused on farm and industrial

machinery, and diesel engines.
- Massey´s products are sold globally by dealers, distributors and retail outlets.
- Massey´s main competitors are both large multinational companies and medium-
to-small firms operating locally with limited product lines.
- Leading competitors in US (Massey´s largest market): Deere and Harvester
- Industry performance is greatly influenced by some crucial external aspects such
as: interest rates, weather, economic cycles, credit and monetary conditions,
macroeconomic trends, etc.
- Key factors to be successful: product-market alignment, market penetration
capabilities, R&D and product development abilities

2) Describe and assess the product market strategy Massey pursued through 1976.
Where possible, compare Massey´s strategy with those of its leading competitors.
Did Massey´s strategy make sense (at the time)?

- If we analyse Exhibit 5, we can see that Massey's sales are almost equally divided
between North America, Western Europe and the rest of the countries. However,
one of the factors that differentiated Massey's product market strategy from other
competitors until 1976 is the fact that it focused on less-developed countries.
During the 70s, the firm was very successful in dealing directly with governments
or public institutions in countries like Iran, Peru or Turkey. On the other hand,
Deere and Harvester fixed their efforts primarily on the North American market.
- Secondly, while Deere and Harvester chose to focus on farm equipment (where
Massey ranked third), Massey decided to focus on small tractors and combine
harvesters taking the lead in this product segment.
- During the 60s and 70s, it is also important to note that the company decided to
undertake an acquisition and expansion program. This aggressive program was
funded by debt, mostly short-term. If we analyse the Debt / Equity Ratio, we see
that it increased from around 1.50 in 1971 to 1.87 in 1976. In fact, Massey was
much more leveraged than its leading competitors (Exhibit 6). In a preliminary
analysis, we can conclude that this excessive leverage prevented the company
from successfully responding to negative economic conditions in the late 1970s.
- We would say that the strategy implemented by Massey made sense at that time
due to some reasons. First, until 1976 there was always an increase in sales.
Between 1971 and 1976, sales increased by about 170%. Another factor that we
can analyse is the Return on Equity. In 1975 and 1976, the company presented
Returns on Equity of 15.34% and 13.45% respectively. However, starting in 1976,
Return on Equity decreased dramatically reaching negative values a few years
later.
- With this, we can see that the strategy followed by the company to focus on
underdeveloped markets until 1976 made sense. After this period, the company
 was unable to respond to events such as adverse economic changes due to
reasons such as high leverage.
3) Describe briefly Massey´s capital structure in 1976. In your view, is this a good
capital structure for Massey? If yes, explain what are its main benefits. If not, what
might explain why Massey has such a capital structure? Where possible, compare
Massey´s strategy with those of its leading competitors.

- During the 1960s and 1970s, Massey initiated an aggressive acquisition plan
financed through debt, mostly short-term. This strategy triggered the company's
debt, making Massey highly leveraged. The Debt / Equity Ratio increased from
1.50 in 1971 to 1.87 in 1976.
- After 1976, the situation worsened with the increase in interest rates that
amplified the costs of debt and the economic recession.
- Due to the precarious scenario created by the excessive debt, the company was
virtually prevented from generating funds to combat the contractionary economic
cycle. At the time Massey needed it most, the company was unable to raise more
funds either through debt or equity (due to loan-related covenants). Additionally,
there were a number of cross-default provisions that made all debts callable if any
default occurred.
- The situation was much worse than the other competitors. If we analyse the
Debt / Capital ratio of the leading competitors (Exhibit 6), we find that both
Harvester and Deere have a much healthier capital structure.

4) What went wrong after 1976? How did Massey respond? How did its competitors
respond? What were the consequences for Massey?

- There were a number of internal and external factors that contributed to the
situation verified after 1976:
o Interest rates: The increase in interest rates had a doubly negative effect
as it increased debt costs and depressed the farm and industrial machinery
markets, which consequently affected Massey´s sales.
o Demand: Due to high interest rates, economic recession, Soviet grain
embargo and drought in the summer of 1980, there was a decrease in
demand for farm machinery. This decrease in demand extended to several
countries (including the North American market) and also affected
Massey's competitors.
o Product-market alignment: Massey's production sites were not in line with
sales. Despite selling to several countries, namely less-developed
countries, production was concentrated in the UK and North America. This
factor made the company too exposed to exchange rate fluctuations. The
appreciation of the British pound against the American and Canadian
dollar led to an increase in COGS and a consequent reduction in margins
and competitiveness.
o North American unsuccessful efforts: The company turned to the North
American market too late. Additionally, the company was slow to offer the
products that the desired market. Efforts in this market also came at a
time when the economic recession and domestic financial difficulties had
already started.
 - Both Massey and the rest of the competitors responded to these difficulties by
increasing their debt. In fact, Harvester in 1980 violated debt covenants and
initiated a debt renegotiation process.
- Massey also decided to cut jobs, close plants, reduce inventories, eliminate
unprofitable operations and sell various assets.
- However, both Harvester and Deere responded better to this hostile situation
because they had a margin to increase debt unlike Massey that was already
excessively leveraged. The increase in the Debt/Capital ratio in leading competitors
was not as sharp and profit margins were more favourable than Massey.

5) At the current stage of Massey´s difficulties, what are the potential options for
alleviating Massey´s financial problems? For each of these, assess briefly whether
they are likely to work out or not, and why?

- There are a number of possibilities that can alleviate Massey's financial problems:
o Government bailout: Massey could seek financial assistance from
governments in countries where it has plants in operation such as Canada
or the United Kingdom. These governments would in theory be willing to
help the company due to the negative effects that could arise if the
company failed, namely unemployment. In reading the case, we find that
governments have shown some resistance to helping a multinational
private company. In October 1980, after the company became employee-
controlled, they provided a guarantee of the capital risk of a part of the
new equity investment.
o Product-market alignment: One of Massey's problems is the fact that
production sites were not in line with sales. Despite selling to several
countries, namely less-developed countries, production was concentrated
in the UK and North America. This factor made the company too exposed
to exchange rate fluctuations. If we analyse Exhibit 5, we see, for instance,
that Australia represents 11.5% of Massey's production capacity despite
contributing only 4.2% to sales. In order to counter this problem, we can
consider 2 possibilities depending on the company's strategic future. If
Massey wants to remain focused on less-developed countries, it would
also be advisable to relocate production to those countries that also offer
the advantage of lower production costs. If, on the other hand, the
company wants to focus on the North American market, it might be
recommended to concentrate production in Canada. With this option, the
company could benefit from economies of scale. All in all, a better
alignment between production sites and markets is recommended to
avoid the risk of currency fluctuations.
o Deleverage: The company is highly leveraged. One possibility is to replace
debt with equity. However, the company's financial difficulties discourage
investors from putting money into the company. Even Argus Corporation
was reluctant.
o Debt renegotiation process: One of the most realistic options is to start a
debt renegotiation process trying to obtain better conditions. It is essential
to try to convert short-term debt into long-term.
o M&A: Massey could try to merge with another company in the industry.
The acquisition seems unlikely due to the company's difficulties.
o Sale of Perkins: Perkins Engines is the firm's most valuable asset. One of
the possibilities considered was the sale of this subsidiary. However, there
is hope that the growth of diesel engines could support the company's
future growth.
o Management model changes: The company needs changes with regard to
working capital management. When analysing Exhibit 1, we find that
Massey has high levels of inventory. The inventory turnover has been
increasing: 2.19 (1978), 2.19 (1979) and 2.60 (1980). At the same time,
Receivables have increased dramatically. It is important to implement
better inventory management techniques and attract customers to pay
earlier.
o Liquidation: Liquidation seems unlikely due to the adverse effects caused
on various stakeholders. In addition, Massey said that the restructuring
process initiated in the late 1970s, which enabled a series of cost-cutting
actions, kept the company viable.