January

11

MASSEY FERGUSON Ltd.

(1980)
Case
Study

Professor Obiyathulla Ismath Bacha

Corporate Finance, FN5033

by:
Wan Fadzil
Azamat Nazarbaev
Fikri Ali Mohammed
Adam Ruslan Nagayev

INCEIF: The Global University of Islamic Finance

Massey Ferguson ltd (1980)

TABLE OF CONTENTS
1. INTRODUCTION .............................................................................................................................. 3
2. PROBLEMS ...................................................................................................................................... 3
3. FACTORS AFFECTED ................................................................................................................... 3
3.1. INTERNAL FACTORS .................................................................................................................... 3
3.1.1. Too fast expansion and growth (M&A) .......................................................................... 3
3.1.2. Inefficient working capital ................................................................................................ 3
3.1.3. Capital structure ................................................................................................................ 3
3.1.4. Product market alignment ............................................................................................... 4
3.2. EXTERNAL FACTORS .................................................................................................................. 4
3.2.1. Interest rate ........................................................................................................................ 4
3.2.2. Demand .............................................................................................................................. 4
3.2.3. Currency exchange .......................................................................................................... 4
3.2.4. Political risk ........................................................................................................................ 4
3.2.5. Extreme climate ................................................................................................................ 4
4. POSSIBLE SOLUTIONS ................................................................................................................ 5
5. CONCLUSION .................................................................................................................................. 5
APPENDIX ............................................................................................................................................ 6

1. INTRODUCTION
Founded in 1847, Massey Ferguson (MF), a division of Argus Corporation, is one of
the leaders in farm equipment production in the world. In 1953, MF merged with the
Ferguson Company, the former UK farm equipment producer, to become MasseyHarris-Ferguson, before finally taking on its current name in 1958. By 1980 it had
manufacturing and assembling facilities in 31 countries and its products were sold in
140 countries. Main products are tractors, diesel engines and industrial machinery.

2. PROBLEMS
In late 1970s Massey Ferguson experienced severe financial losses and in fact
reported an unprecedented year-end loss of 262 million USD in 1978. We have
attempted to identify the problems the company was faced with and divided them
into two groups: internal factors or firm specific and external factors, or market-wide.

3. FACTORS AFFECTED
3.1. Internal Factors
3.1.1. Too fast expansion and growth (M&A)
The company has made many acquisitions in different countries without taking time
to stand firmly in terms of marketing decisions, procedures, etc. It seems that the
priority was given to expansion strategic decisions without implementation of a
proper operational framework. (see Table 3 in the Appendix)
3.1.2. Inefficient working capital
MF adopted an aggressive financing strategy. The expensive short term financing
was utilized to finance non-earning assets: inventories and accounts receivables.
Later, in 1980, the company started to offer a hire-purchase contract to its customers,
rather than facilitating bank loans for them. (see Figure 5, and 6).
3.1.3. Capital structure
The company was highly leveraged compared to its peers. (see Chart 1). MFs high
dependence on short-term debt played its significant role in the companys severe
financial distress leading it to default in early 1981 as the company was unable to
meet its short run obligations. The company attemted to issue preferred stocks in
April 1980; however its major stakeholder AGCO blocked the decision. On the whole,
MF could not issue equity and, thus, obtain long term capital. Therefore, it had to
depend on short-term debt.

3.1.4. Product market alignment

Not only MF suffered from imbalanced capital structure but also from misaligned
product market. It produced machines in highly developed countries and sold them in
less developed states. (See Figure 8, 9, and 10).

3.2. External Factors

3.2.1. Interest rate
The US economy and other major economies were hit by high inflation in 1974/75
and 1979/80 (see Figure 10). The majority of economists state that the 1973/74 and
1979/80 oil crises were the main cause of the economic downturn. However, others
view the roots of that economic hardship in excessive global liquidity. In particular,
after the demise of the Bretton Woods System in 1971 the Japanese and European
central banks intervened heavily to prop up the dollar and greatly boosted money
supply. Nevertheless, OPEC oil price hike was indeed evident. To contain the high
inflation Paul Volcker, the chairman of the Fed, tightened the Fed funds rate by
increasing it from 11% in 1979 to 20.5% by January 1981. Massey Ferguson was hit
hard since its operations were mainly financed by short-term debt, thus its financing
costs went up dramatically.

3.2.2. Demand
MF's renewed drive into the North American market in the late 1970s regrettably
happened in line with the aggregate demand fall in the U.S. economy as the country
was entering deep recession. The U.S. GDP in 1980 and 1982 stood at just below
zero growth and far below at -4% respectively. Private consumption also fell
considerably.
3.2.3. Currency exchange
With the enlarged production of the North Sea oil in the late 1970s the UK pound
sterling appreciated significantly against the other major currencies including the
currencies in which Massey Ferguson traded its products (see Table 4).
3.2.4. Political risk
Despite MF was successful in negotiating with less developed countries and the
Eastern European governments, the company was still susceptible to unstable
political conditions in those countries. For example, the 1979 Iranian revolution, or
Pakistans regional problems in 1970s.
3.2.5. Extreme climate
In June-September 1980 anomalous heat and drought covered vast territories of the
USA. Total deaths amounted 10,000 people. Agriculture and related industries were
estimated to have lost $20.00 billion.

4. POSSIBLE SOLUTIONS

Restructuring/refinancing: to avoid disruption of operations. This involves

paring down debt towards optimum capital structure by rescheduling and
having debt-equity swap. The nature of MFs industry would necessitate a
more conservative strategy with preference for long term funding.
Re-evaluation: to determine a set of core businesses in which it should further
invest to ensure its growth, possibly with governmental policy assistance.
Merger & acquisition: but in the light of negative performance of MF, it is
highly unlikely.
Liquidation: it would cause shareholders to lose full amount of their investment,
job cuts, disappearance of an important investor in their respective countries,
and deprive lenders of full recovery.
Government bailout: too big to fail the most feasible option.

5. CONCLUSION
The above facts about MFs financial status in the late 70s revealed their problems,
which was clear for sound decision makers either investors or creditors. Investors,
on the one hand, aim to benefit from capital gain which is the growth of company
value and hence the stock prices. On the other had, some investors are interested in
dividends for coming periods by buying shares of a company. In the case of MF,
neither capital gain nor dividends were expected. On contrary, the company was
demonstrating all the signs of a near bankruptcy and in fact it began fiscal year 1981
in default on its total debt of $2.5 billion. Finance leverage was too high comparing to
its competitors. MF stopped paying dividends to its shareholders in 1978 while its
capital loss per share reached $12.79 in 1980. The company also lost 69% of its
market value from 1976 to 1980. In general, Massey Ferguson had poor
performance, particularly due to bad financial management and planning. The
company also had cross-default provisions on its debt obligations, meaning that a
single default on one loan contract would have led to an automatic default on all its
debt obligations. Taking into account all these reasons, we believe it would have
been not right decision for both existing and prospective shareholders to invest into
MF in the late 70s.
To sum up, neither long term debt nor equity was available for MF due to its high
financial leverage, poor financial management and position in the late 1970s; thus, it
was forced to raise short-term funds. In other words, MF was far beyond its optimal
capital structure. This fact played one the of the main roles in the companys
financial distress.

APPENDIX
Figure 1: Stock performance

OPER. PROFIT / SALES

NET INCOME / SALES

9.0%

15.0%

6.8%

11.3%

4.5%

7.5%

2.3%
0%

3.8%

-2.3%

0%

-4.5%

-3.8%
-7.5%

-6.8%
1976

1977

1978

1979

1980

-9.0%

1976

1977

1978

1979

1980


Table 1: Balance Sheet (in millions of USD)
DESCRIPTION

1978

ASSETS
Cash
Receivables
Inventories
Prepaid expenses, other
Current assets
Investments
Fixed assets, net
Other assets and deferred charges
Total Assets

USD
23.4
531.3
1,083.80
63.8
1,702.30
213.3
602.2
29.3
2,547.10

1979

1980

%
0.92%
20.86%
42.55%
2.50%
66.83%
8.37%
23.64%
1.15%
100%

USD
17.2
731.1
1,097.60
89.8
1,935.70
217.1
568.7
24
2,745.50

%
0.63%
26.63%
39.98%
3.27%
70.50%
7.91%
20.71%
0.87%
100%

USD
56.2
968.2
988.9
93
2,106.30
205.8
488.2
27.3
2,827.60

%
1.99%
34.24%
34.97%
3.29%
74.49%
7.28%
17.27%
0.97%
100%

LIABILITIES
USD
Bank borrowings
362.3
Long-term debt, current portion
115
Accounts payable and accrued charges 778.7
Other
16.1
Current Liabilities
1272.1
Deferred income tax
64.3
Long-term debt (less current portion) 651.8
Minority interest in subsidiaries
18.4
Total liabilities
2006.6
Redeemable preferred shares
95.8
Common (18,250,350 shares)
176.9
Retained earnings
267.8
Shareholders' equity
540.5

%
14.22%
4.51%
30.57%
0.63%
49.94%
2.52%
25.59%
0.72%
78.78%
3.76%
6.95%
10.51%
21.22%

USD
511.7
59.3
907.4
31.1
1509.5
13.8
624.8
19.1
2167.2
95.8
176.9
305.6
578.3

%
18.64%
2.16%
33.05%
1.13%
54.98%
0.50%
22.76%
0.70%
78.94%
3.49%
6.44%
11.13%
21.06%

USD
1,015.10
60.2
793.8
24.5
1893.6
14.3
562.1
4.5
2474.5
95.8
176.9
80.4
353.1

%
35.90%
2.13%
28.07%
0.87%
66.97%
0.51%
19.88%
0.16%
87.51%
3.39%
6.26%
2.84%
12.49%

Total liabilities and shareholders' 2,547.10

100%

2,745.50

100%

2,827.60

100%

equity

Table 2: Income Statement (in millions USD)

DESCRIPTION

1978

1979

1980

ITEMS
Net sales
Cost of goods sold, at average

USD
2926

%
100.00%

USD
2973

%
100.00%

USD
3132

%
100.00%

2371

81.03%

2382

80.12%

2569

82.02%

0.00

0.00%

19.00

0.64%

0.26%

2371

81.03%

2400

80.73%

2576

82.25%

372.00

12.71%

352.00

11.84%

405.00

12.93%

Engineering and product

Interest on long-term debt
development
Other interest expenses**
Interest income
Exchange adjustments
Minority interest
Miscellaneous income
Total costs and expenses

66
79
108
0
91
-1
-11
3,075

2.26%
2.70%
3.69%
0.00%
3.11%
-0.03%
-0.38%
105.09%

58
76
129
-40
-25
1
-10
2,941

1.95%
2.56%
4.34%
-1.35%
-0.84%
0.03%
-0.34%
98.92%

60
71
230
-42
50
0
-14
3,336

1.92%
2.27%
7.34%
-1.34%
1.60%
0.00%
-0.45%
106.51%

Profit (loss) before items shown

-150

-5.13%

32

1.08%

-204

-6.51%

Provision for reorganization expense -116

Income tax recovery
-12
Equity in net income of finance
16

-3.96%
-0.41%

-95
6

-3.20%
0.20%

-29
10

-0.93%
0.32%

0.55%

17

0.57%

23

0.73%

0.17%

0.17%

0.00%

-257

-8.78%

-35

-1.18%

-200

-6.39%

0
0
-257

0.00%
0.00%
-8.78%

-23
95
37

-0.77%
3.20%
1.24%

-26
0
-225

-0.83%
0.00%
-7.18%

0.00%

-6

-0.20%

58

1.85%

exchange rates for year

Effect of foreign currency exchange
rate changes*

Marketing, general, and
administrative

below

subsidiaries
Equity in net income of associate
companies
Income (loss) from continuing
operations
Loss from discontinued operations
Extraordinary item
Net income (loss)
Unfavorable (favorable) impact on
continuing operations of exchange
adjustments and foreign currency
exchange rate changes in cost of
goods sold

Table 3: Acquisitions
Year

Company

Country

1955

HV Mc Kay

Australia

1959

Landini

Italy

1959

Perkins Engines

UK

1966

Ebro

Spain

1973

Eicher

Germany

1974

Hanomag

West Germany

1974

Contract

Poland

($360mln)
Figure 6: Main components of Current Assets

Figure 5: Net working capital

Current Assets

Net Working Capital

1200
1100

800

732

1000

700

900
800

697

625

600
502

Millions of USD

700
600
500
400
300
200

500
400

439
336

430

427

372

300

212

200

100

100

0
1971

1972

1973

Cash

1974

1975

Receivables

1976

1977

1978

Inventory

1979

1980

Other

1971

1972

1973

1974

1975

1976

1977

1978

Chart 1: Financial leverage

DEBT TO ASSETS

TOTAL DEBT TO CAPITAL

90.0%

90%

67.5%

68%

1976

1977

1978

1979

45%

45.0%

23%

22.5%

0%

0%

1980

1976

1977

1978

1979

1980

1979

1980

SHORT-TERM DEBT TO EQUITY

TOTAL DEBT TO EQUITY

60.0%

8.00

45.0%

6.00

30.0%

4.00

15.0%

2.00

0%

1976

1977

1978

1979

1980

1976

1977

1978

1979

1980

Figure 7: Sales in 1980

Sales: 1980
Scandinavia,
114

Turkey, 14
Pakistan, Japan, 25
29
Iran, 31
Canada, 219
South Africa, 66

Australia, 131

Argentina, 44
United States,
819

Brazil, 306
Benelux, 28
Spain, 8
West Germany,
157
Italy, 211

Mexico, 75
United
Kingdom, 297

France, 227

10

Figure 8: Diesel Engines Production Capacity in 1980

Diesel Engines: 1980

United Kingdom
United Kingdom
France
Brazil
Australia

Figure 9: Farm Equipment Production Capacity in 1980

Farm Equipment: 1980

Canada
United Kingdom
United Kingdom
France
Italy
West Germany
Brazil
Argentina
Australia

Figure 10: US inflation in 1970-1985

US Ination: 1970-1985

15
10

11

1985

1984

1983

1982

1981

1980

1979

1978

1977

1976

1975

1974

1973

1972

1971

1970

Table 4: Currency exchange rates to 1 pound UK

Year
1978
US Dollars
1.92
German Marks
3.85
French Francs
8.65
Canadian Dollars 2.19
Australian Dollars 1.68
Swish Krona
8.67
Norwegian
10.05
Italian Lira
1,628.30
Kroner

1979
2.12
3.89
9.02
2.48
1.90
9.09
10.74
1,762.20

12

1980
2.33
4.22
9.82
2.72
2.04
9.83
11.48
1,988.60

1981
2.03
4.57
10.96
2.43
1.76
10.21
11.61
2,289.90