Massey Ferguson Case

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Question 4. a) What are the main problems for MF in 1980? What alternatives were available to MF? Market-wide problems: • High interest rates – After the 1973 oil crisis and the 1979 energy crisis, the US economy was affected by stagflation. In an effort to fight excessive inflation, the Fed adopted a tight monetary policy, raising interest rates (as an illustration, the federal funds rate increased from 11% in 1979 to 20% by June 1981). This affected all players as it led to a plunge of stock market prices, on the one hand, and an economic recession, on the other. Furthermore, Massey was particularly hit hard: since it mainly financed its operations with short-term debt, its financing cost went up dramatically. • Low demand – The…show more content…
This made it very difficult to negotiate the restructuring of claims the company needed to survive. Finally, cross-default provisions substantially increased Massey's default risk. If any single default ocurred, all short- and long-term debt would become callable, leaving the company with no choice but to stop operations and use its assets to pay off lenders. • Inability to further finance its operations – While Massey needed new funds even to be able to honour its commitments, its extremely high leverage and the numerous covenants on its existing loans impeded it from raising new debt, or equity for that matter. Its 1980 initiative to issue preferred shares was indefinitely postponed when its largest shareholder refused to take a block of the preferreds as a vote of confidence. • Currency risk – In 1980, 76.7% of Massey's engine production was concentrated in the UK. However, its UK Perkins subsidiary exported more than 86% of its products. As a consequence, when the pound rose in 1980, it increased Massey's cost of goods sold disproportionate to its revenue, reducing margins. • Operating costs of financial distress – Doubts about the future of the company weakened Massey's distribution network. Furthermore, the bargaining power of its customers and suppliers increased, so that while barely supporting its daily operations, Massey granted

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