Massey Ferguson Case Study

Creditors:

Short-term creditors are concerned with the company's ability to repay its short-term obligation and its ability to quickly turn its inventories into liquid cash. One method for determining a company's ability to pay its short-term debt, are liquidity ratios. Coverage has to increase again. From 46% to as much as 100%.

Employees:

We can conclude that MF came into financial trouble due to the following reasons:

MF used an aggressive expansionary strategy to become one of the largest multinational producer in farm and industrial machinery as well as diesel engines. To reach this goal MF made use of a large amount of short term debt in order to make the necessary investments.

The percentage total debt over capital rose from 46.9% in 1976 to 80.85% in 1980. This is a very high number for a capital intensive company. This is probably caused by high inventories due to the fact that in North America MF’s product line was not successful, the amount of dealerships in North America also fell by 50%.

The competitors, Deere and International Harvester, however maintained, in the period from 1976 to 1980, their debt/capital and short term debt (STD)/capital percentages much lower than Massey Ferguson. The difference between the percentages also increased significantly over time. Due to the high interest rates in 1979 and 1980 the large amount of STD became a double burden for Massey Ferguson since the cost of debt increased heavily, this effect was less for their competitors. Also the high interest rates depressed the market for machinery lowering the company sales.

Another problem for MF was that all the lenders had debt covenants stating that when one of the covenants was broken, e.g. Massey Ferguson could not repay one loan all of the other loans would then become callable.