Corporate Finance – Massey-Ferguson
Corporate Finance Massey Ferguson Executive Summary This report provides an analysis of the product market and financial strategies of Massey-Ferguson through 1976 as well as highlights the issues faced by the company and the underlying causes of its declining performance from 1977 to 1980. The report also assesses the various alternatives to recover the company from its financial crisis and provides recommendations based on an in-depth strategic and financial analysis of the historic data and facts provided in the case about the company and its competitors. Results of data and financial statement analysis in Exhibit 1 show that the company’s profitability declined from 3.92% to -7.18%, and its debt to capital ratio increased from 46.9% to 80.85% in the last five years. This is very high compared to the industry average, which increased from 37.62% to 46.92% during the same period. Massey’s explosive growth in the 1960s and 1970s acquiring assets and expanding operations was financed by short term debt, which is why the problems for Massey began to mount over the next several years. Its debt to equity ratio increased substantially from 97.03% in 1971 to 519.55% in 1980 (Exhibit 1) which shows how highly leveraged the company became over a period of ten years. In 1980 the company has $5.19 of debt for every dollar of equity.
The industry then experienced a contraction post-1976 driven by weather, capital restrictions, Cold War politics, and changes of governments in the developing world. With reduced income but persistent debt, Massey found itself with a severe liquidity problem in the fall of 1980 with $2.5 billion in debt, $60 million in long-term debt due the next year, and -$225 million in net income. Because the company was unable to pay accumulated preferred dividends, Massey was not able to immediately issue shares for an infusion of cash. It was in this framework that we considered several alternatives to solution the financial woes of Massey, including: the sale of additional company assets (Perkins among others) to pay off debts, a stock issue, a debt to equity swap, bankruptcy, and a government bailout. Below is a summary of our recommendations.The ideal scenario for Massey would be to receive a bailout from the governments of Ontario, Canada, the United Kingdom, or any combination. It is our recommendation that Massey should lobby the governments to either buy equity and own a controlling share of the company or offer debt financing with frozen interest payments for as long as could be negotiated. The government equity purchase would give direct cash infusion, which could be used to pay down debts, and debt financing would take the pressure off of Massey to make debt payments. Massey should be mindful of any government’s apprehension to engage in a bailout and should make every effort to convince the relevant governments that its going-concern value is positive it just lacks sufficient cash in the short-term. Additionally, managerial and organizational changes to the firm should be made in order to support the continued health of the firm and its ongoing operational strategy, including a new management staff.