Massey-Ferguson Case

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Massey Ferguson Case

Advanced Corporate Finance

The Company

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
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First, the expansion in the 1970s was financed by debt, much of it short term. This was the reason for its high (short-term) debt-value ratio. Although this might have been in line with Massey’s growth strategy, it made Massey sensible for the increase in the interest rates. This increase resulted in a dramatic rise of cost of Massey’s short-term debt.
Second, Massey had an enormous amount of debt outstanding with more than 100 banks around the world which resulted in numerous covenants related to these loans. These covenants hindered Massey’s free access to the capital market. Hence, Massey couldn’t attract equity to finance the company and was dependent on loans. Finally, most of the borrowing from banks was unsecured. Because of the higher risk of unsecured debt, the loans were more expensive. That is, unsecured debt leads to higher interest rates. Thus this was also a reason for high costs of debt.
Together with the decline in demand in North America and depressed markets in Europe and the Third World, these high costs of debt and inaccessible capital market formed the cause of the financial distress Massey went through.

Reaction of the competitors

| 1980 | 1979 | 1978 | 1977 | 1976 | Massey-Ferguson | 28.19% | 27.09% | 31.03% | 32.08% | 33.94% | International Harvester | 22.57% | 27.96% | 24.90% | 26.70% | 27.70% | Deere & Company |
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