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    Massey Ferguson: Case Report

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    Carlos B
    1) Massey-Ferguson's (MF) capital structure was extremely risky, with an 80% debt to equity ratio in 1980, which contributed to its financial difficulties. Its international expansion plans did not offset declining market share in North America. 2) The lack of independence between MF's management and board of directors led to poor oversight of the company's finances. This resulted in overleveraging and mismanagement of foreign currency exposure. 3) From 1976 to 1980, MF's shareholder equity declined from 35% to 12% as debt levels increased, transferring ownership from shareholders to debt holders. A series of poor strategic decisions by management reduced the company's value.

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    Massey Ferguson: Case Report

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    Carlos B
    253 views5 pages
    1) Massey-Ferguson's (MF) capital structure was extremely risky, with an 80% debt to equity ratio in 1980, which contributed to its financial difficulties. Its international expansion plans did not offset declining market share in North America. 2) The lack of independence between MF's management and board of directors led to poor oversight of the company's finances. This resulted in overleveraging and mismanagement of foreign currency exposure. 3) From 1976 to 1980, MF's shareholder equity declined from 35% to 12% as debt levels increased, transferring ownership from shareholders to debt holders. A series of poor strategic decisions by management reduced the company's value.

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    This is the solution to the Massey Ferguson Financial Case, in which MF overleveraged.

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    Massey Ferguson.docx

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    1) Massey-Ferguson's (MF) capital structure was extremely risky, with an 80% debt to equity ratio in 1980, which contributed to its financial difficulties. Its international expansion plans did not offset declining market share in North America. 2) The lack of independence between MF's management and board of directors led to poor oversight of the company's finances. This resulted in overleveraging and mismanagement of foreign currency exposure. 3) From 1976 to 1980, MF's shareholder equity declined from 35% to 12% as debt levels increased, transferring ownership from shareholders to debt holders. A series of poor strategic decisions by management reduced the company's value.

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    © All Rights Reserved
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    Download as docx, pdf, or txt
    253 views5 pages

    Massey Ferguson: Case Report

    Uploaded by

    Carlos B
    1) Massey-Ferguson's (MF) capital structure was extremely risky, with an 80% debt to equity ratio in 1980, which contributed to its financial difficulties. Its international expansion plans did not offset declining market share in North America. 2) The lack of independence between MF's management and board of directors led to poor oversight of the company's finances. This resulted in overleveraging and mismanagement of foreign currency exposure. 3) From 1976 to 1980, MF's shareholder equity declined from 35% to 12% as debt levels increased, transferring ownership from shareholders to debt holders. A series of poor strategic decisions by management reduced the company's value.

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    FINANCIAL MANAGEMENT II

    Massey Ferguson
    Case Report
    Carlos Bueno

    [Type the abstract of the document here. The abstract is typically a short
    summary of the contents of the document. Type the abstract of the document
    here. The abstract is typically a short summary of the contents of the document.]

    Massey-Ferguson (MF)

    Overview
    MFs capital structure was extremely risky, it had a debt to equity ratio of 80% in
    1980 when Deere Cia with a 75% bigger market share, had a ratio of 40%. Its
    operating margins were negative since 1978 while Deere and Int. Harvester only
    had negative results in 1980 and its market share shrank from 34% in 76 to 28% in
    1980, apparently Deere Cia captured MFs market share.
    The internationalization of MFs operations did not work as planned, none of the
    markets MF was betting on could offset the loss of market share to Deere in North
    America. Also the lack of risk management in its international operations the
    pound appreciation hurt sales of its UK operations.

    What were the benefits/costs of separation of ownership and


    control over financial capital in MF?
    Among all problems it had in 1980, the one that stands out is lack of control
    between management and the board of directors. It seems that the board of
    directors was too linked to management to control it appropriately. The lack of
    control in MFs finances is what caused the overleveraging of the company as well
    as the mismanagement of foreign currency exposure involved in MFs international
    operations.
    Analyzing the performance of the board of directors, shareholders (Argus Corp) and
    top management one can only conclude that the lack of corporate governance at all
    these levels originated the mismanagement of MF. This is an example of a company
    where internal controls and policies did not play in favor of the shareholders. The
    lack of independence of the board of directors, the complacency of lenders
    -especially the Canadian Imperial Bank of Commerce in which MFs largest
    stockholder was a member of the board of directors- and bad risk management
    control destroyed shareholders equity.
    MF management was slow to react to cut expenses and restructure the company
    while they still had some financial freedom. Its inability to divest some of MFs
    operation to concentrate in the domestic market was also negligence in strategic
    terms. It seems obvious to defend the companys local market rather than give it
    away for smaller much riskier markets abroad. But in the case of MF, management
    had the wrong strategy because when the world economy fell into a recession cycle,
    the markets MF was betting on were much more volatile and sales contracted at a
    higher pace than MFs competitors.

    At the shareholder level, Argus had asymmetric information about MFs future and
    did not want to increase its stake, which end up hurting MFs chances to raise
    capital to restructure its operations. Argus Corp. seemed to want to profit on the
    restructure with MFs creditors since it had a smaller stake relative to all debt
    holders. This is another example when conflicts of interest block the way for a
    convenient and successful reorganization.

    Evolution of Massey Ferguson Equity shrinkage from 1976 to 1980


    1976

    Total Liabilities; 17%

    Long Term Debt; 13%

    Assets; 50%

    Current Liabilities; 19%

    1978

    Total Liabilities; 11%


    Long Term Debt; 14%
    Assets; 50%

    Current Liabilities; 25%

    1980
    Total Liabilities; 6%
    Long Term Debt; 10%

    Assets; 50%

    Current Liabilities; 33%

    Shareholders equity went from 35% to 12% from 1976 to 1980. As shown in the
    graphs above, In other words, MF management reduced the value of the company
    through a series of poor strategic decisions while the transfer of ownership from

    shareholder to debt holders reduced the claim of stockholders over the assets of the
    company.
    Top management underestimated the cost of financial distress and bankruptcy. If
    the company had had in mind the potential implications of incurring in that amount
    of debt, it would have reacted sooner and avoided defaulting on its outstanding
    debt. Other aspect that is worth mentioning is the permissive and suspicious
    complacency of lenders that allowed MF to accumulate debt over these years.

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