Case analysis massey ferguson essay
Massey Ferguson Limited a major international producer of Farm machines and diesel powered engine started its functions way back in 1847 and by the finish of nineteenth century they had operations through 31 countries of the world. In the late 70s Company got financial loss in US. $262. 2 million.
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1) Product-Market Strategy:
Massey’s product line consisted of tractors, incorporate harvesters, balers, forage harvesters, agriculture accessories, farmstead instruments and other gear for farming use. Industrial line contains Industrial vehicles, loaders, rough terrain forklifts, skid control loaders, energy loaders and skidders.
In 1980 Massey was keeping
17% market share worldwide in tractors.
14% industry for combines.
13% in Market machinery.
History shows that Massey had been solid in Market outside United states and Traditional western Europe. Massey Production features were also over the different area of the world (Exhibit 5). Most significant facilities were located in Canada, France, England, and Quotes. In significantly less developed countries like Pakistan, Peru, Egypt, Iran, Libya, Turkey, Arab saudi, Sri Lanka, Sudan and Macia, mozambique Massey was quite effective in performing the legal agreements and procedures.
It is very obvious as Massey received $360 , 000, 000 contract to update Peru’s tractor and diesel engine industry.
In 1980 Massey purchased diesel engines coming from Perkins Engine Group that has been the manufacturer of diesel-powered engines in England. 50% of Perkins’s diesel powered engine foreign trade worldwide was going to Massey’s subsidiaries and online marketers. Because of rising gasoline rates there was huge shift to diesel motors, so it was bringing in an efficient market to Massey too
2) Economical Strategy:
During 1960’s and 70’s Massey was aggressively involved in growing its operations and gathering new possessions which was majorly financed by Debts regarding short term characteristics. By 78 Massey’s Debt/Equity ratio= 214% (Exhibit 4) Same 12 months Massey lost US. dollar 262. 2 million, supervision associated this loss to following reasons:
High Interest rates
Imposition of Monetary plans and credit restrictions in Argentina and Brazil, which usually ultimately causes sales to decline. Drop in American natives’ income and higher prices of products.
Beside this kind of loss business laid off their employees by 68, 1000 to forty seven, 000, lowered inventories by US dollar. 1083. two to US $. 988. 9 mil, 24 crops were shut. Despite all of these moves there was continuous deficits all around the world specifically on operations that was approx ALL OF US $35. 5 million or perhaps US money. 2 . 38/share. At the end of first three or more quarters of 1980 company had negative loss of US $ 62 million which includes currency alterations of U. S money 37 million.
3) Relative Strategy:
Massey Competitors in farm and industry sector included:
Huge multinational firms with full product lines
Moderate and small enterprises, performing business nearby with limited range of products.
Named: Deere & co and International harvesters. Massey was customarily ranked a few rd in sales of farm products behind Deere & Co and Worldwide Harvesters. Yet, in 80’s Massey occupied second position in market pertaining to small tractors and incorporate harvesters. In contrast with its competition, Massey Ferguson chose to financing its expansionary agenda generally through debt offerings and short term credit lines. This type of building had extremely detrimental implications for Massey Ferguson. The utilization of so much leverage would boost the risk of the projects these were undertaking further than the sector standard. Firms in the same industry just like Deere and International Harvester throughout the 1976-1980 period maintaineddebt/capital and STD/capital percentages consistently lower than Massey Ferguson (a trend that exacerbated while time gone on).
Therefore if the plantation equipment marketplace were to weaken, relatively, Massey Ferguson could find alone in a less favorable placement. Along with the enhance of risk on jobs, the weighty use of debts financing likewise restricted Massey Ferguson’s economical flexibility. Massey Ferguson’s debts finance structure is spread out among twenty one different suppliers in over nine countries. Each one of these loan providers having financial debt covenants that belongs to them with the arrangement that if one of these contrat were to be cracked all of Massey Ferguson’s debt becomes callable.
These types of constraints can slow down company financial options during down instances (as they did when Massey Ferguson attempted an fairness issuance in 1978). The emphasis on temporary credit lines was also a suspect choice of finance structuring. Expansionary/market penetrating approaches typically griddle out through losses for the short term in order to recognize larger gains in the long term. Along with a great expansionary technique, Massey Ferguson was likewise increasing spending in R&D for production of higher hp tractors to promote in America and for diesel-powered engine production.
What travelled wrong?
1) Market-wide complications:
High rates of interest after the 1973 oil catastrophe and the lates 1970s energy turmoil, the US economic system was afflicted with stagflation. So that you can fight abnormal inflation, the Fed adopted a tight budgetary policy, raising interest rates (as an example, the national funds charge increased from 11% in 1979 to 20% by Summer 1981). This affected all players as it led to a plunge of stock market rates, on the one hand, and an economic economic downturn, on the other. Furthermore, Massey was particularly strike hard: because it mainly loaned its operations with short-term debt, it is financing cost went up dramatically.
2) Low demand
The aforementioned monetary coverage pushed the American overall economy into recession. Massey’s restored drive in North America (by 1978, completely introduced a fresh range of huge, high-horsepower vehicles and a great improvedbaler line) unfortunately require went down and MF needed to suffer
3) Exchange charge:
High exchange rates were another area of concern which destroyed the MF as the pound sterling rate was increasing. MF cost of items sold also had a direct impact which usually ultimately lower the profit of the company and company dropped its competitive edge.
4) Capital structure:
¢ Massey’s financing alternatives over the years brought with them many concerns, which irritated the already grim condition in the product markets. 1st, during it is expansion in the1970’s, Massey levered on its own immensely. In comparison to its two main rivals, it methodically had the highest Total Debt/Capital ratio (in 1980: eighty. 85% when compared with 53. 56% for Worldwide Harvester and 40. 28% for Deere & Company). While this could have been validated by the expansion strategy, it turned out to be incredibly damaging pertaining to the company taking into consideration the current scenario.
What was more unusual was the fact that it used short-term financial debt to finance its organization operations, set asset capital maintenance, and long-term main and fascination repayments. As a result, Massey was much more afflicted with the increase in interest rates than that of the competitors where MF dropped its border. Cost of personal debt of MF in 1980 was 229. 9 mil $ when compared with net income of 225. 2 million money that shows the real history.
The main alternatives open to MF happen to be:
Beneath the current circumstance, no company decide to merger with MF while:
Company’s shares really worth was about $100 , 000, 000 but exact same times added capital of $ 500 million was required to proceed operations which has been not possible under the current conditions.
Companies short term debts had been about to mature which was an additional additional burden on the part of business. MF got 100 mil $ of receivables in thisrecession era. Additional 100 million bucks inventories were there in demand lowering market scenario.
Another choice that MF has, to pay up their loss by selling any of their unit nevertheless financial side of the firm and Product-market position doesn’t make this choice viable.
If MF goes for Liquidation option same situation is still that:
Stakeholders will not get anything out of it since already industry’s financial value is very much right down to $5 coming from 25$ dollar 1 million receivables and inventories are not going to pay out at their full that is again reduction for the stakeholders. Under the current note buyer MF benefit will further go down if liquidation choice is to be deemed.
The very last considerable choice to MF was refinancing the capital structure to be able to bring in the total amount between the fairness and debts structure. Although under the circumstances bringing in shares will not be convenient consideration since investors will never be ready to financing such project which is already close to be defaulted. Therefore company can consider
Transforming debts to equitie
Sweeteners with fresh debts.
Refinancing is usually an alternative that is certainly best to be considered, our suggestion to MF are:
MF should convert their very own debts to equity in immediate basis as financial debt holders is not going to get whatever if firm gets arrears and by getting shares they are the part of business board of directors as well. On instant base they will request their particular stake owners to hold on for certain time frame. Company will probably pay them curiosity with enhancement in financial positions. Sweeteners or justifies are other option they can provide to personal debt holders that will bring in anything positive to opt for since MF features good probability to come up with funds. Government staying the key stakeholder is ready to guarantee the new equity investment in Massey like company closes its operations ultimately a large number of employees will be direct burden on the govt.
Learning From the situation Study:
The major learning’s from the case study are:
Organizations should not aggressively opt for aggressing financing when they are dealing in very cyclical marketplace where risk is excessive or extremely uncertain. Extreme debts in good times aren’t a good financial strategy, corporation should make a balance among capital structures and bring in equity funding when in good time. Interaction of product industry and monetary risk should be carefully regarded as while carrying on several long term techniques for the organization.
Competition strategies should be monitored although designing economical structure, don’t act brief sighted.
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