Case Study Ofmassey Ferguson Case

EF4313 - Individual Case Questions:

“Massey-Ferguson, Ltd.  (1980)”

1. Net sales for Massey-Ferguson actually increased between 1979 and 1980.  Despite this, net income and income from continuing operations both dropped sharply in 1980.  Which item on the income statement was most responsible for this drop in income?

(1) According to Exhibit 2 (P. 10), net sales of Massey had increased by U.S.$ 159.1 million from $2973 million in 1979 to $3132 million in 1980. However, the increased expense offset the positive effect of increased sales. The total costs and expense increase by $396 million from $2940 million to $3336 million. Hence, the increased expense is the reason for negative loss in 1980.

Among the costs and expense, the items attributes most to the income loss is “interest on long-term debt” and “other interest expense”. These two items cost $300 million.  Note that majority of interest expense is for the “other interest expense”. Therefore, the sharply increased interest expense is the most important reason to cause income loss. 

(2) The other factor is the “unfavorable impact of exchange adjustments and foreign currency”. It causes $107.5 ($57.6+$49.9) million loss in 1980. This loss is sourced from the lack of product-market alignment.  As shown in Exhibit 5, the produce of Massy sold throughout the world but the manufactures are concentrated in U.K and Canada. Hence, the increased UK pound generates additional cost for the firm.

1. Why would it be difficult for Massey-Ferguson to conduct an equity issue to pay down its debt?

1. Massey’s 18,250,000 shares of common stock were listed on the New York, London, Toronto, Montreal and Vancouver stock exchanges. From January 1976 through July 31m 1980, Massey lost 69% of its market value (Exhibit 9). Hence, the declining stock price makes it hard to issue common stocks.

1. Covenants: According to the “The Players” section (P. 6), it was mentioned that numerous covenants related to Massey’s loans hampered Massey’s access to capital markets. For example, before Massey could issue new preferred shares, it had to pay accumulated preferred dividend. But covenants on certain U.S. loans had restricted dividend payment since Massey was reported as profit loss.

1. Moreover in 1979, it was reported that Argus Corporation, which had owned a controlling interest in Massey, was not interested to further finance Massey. Later in 1980, a preferred stock issue was postponed indefinitely, which in part was because Argus was reluctant to take a block of shares. All the above were factors which had caused difficulties for Massey-Ferguson to issue new equity.

1. Why would the Canadian government have any interest in helping Massey-Ferguson refinance its debt?

1. Massey-Ferguson borrowed total debt of US$1.6billion from more than 100 banks around the world, as shown in exhibit 7 &8. It is hard for Massey to renegotiate debt with so many lenders.
2. If Massey is shut down, its 6,700 Canadian workers are vulnerable.  Annual unemployment compensation would be $67 million.
3. The Wall street Journal attributed the government’s action to the upcoming Ontario provincial election and the need to protect jobs.  Meanwhile, the Trudeau government is trying to use Massey to help its constitution plans.