Massey-Ferguson is the company called “the one true multinational”. Its products were sold to all over of the world. Massey has two categories of products, farm and industrial machinery and diesel engines. For the farm and industrial machinery, North American and the United Kingdom were account for 81.3% supplies for the whole world market. And for the diesel engines, the United Kingdom is account for 77.7% supplies for the world. Because of the high price of pound, this lack of product-market alignment made Massey sensitive to the currency fluctuation, which can be evidenced by the two large amount of exchange adjustment in 1979 and 1980. In contrary, ...view middle of the document...
First, high interest rate will increase the cost of short term debt. Second, high interest will depress the demand. Since the short-term debt/ capital ratio of Massey was keeping higher than the Deere and Harvester from 1976 to 1980, the high interest rate would hit Massey harder than its competitor because of the increasing cost of short term debt. So, although the interest rate is the risk for all the players in the industry, the capital structure of Massey made it more risky than its competitor.
In 1980, Massey’s inventory is 35% of the assets, and its receivables 34% of the asset. The high inventory is signal of poor operation management, and the high receivables means Massey has the problem on the collection of its receivables. These mean that there is some problem in Massey’s ability to generate operating cash. Based on Massey’s high Debt to Equity ratio (nearly 400% in 1980), Massey would be exposed to high financial risk at the high interest rate because it may have no enough cash to pay debt. That’s one of the reasons why Massey was in financial difficulties in 1980.
Massey raised its debt in its capital structure dramatically in 1970s. And much of the debts are short term. This type of capital structure would have very detrimental implications on Massey. In contrast with its main competitors Deere and Harvester, Massey’s both /capital and STD/capital percentages were consistently higher than these percentages of Deere and Harvester from 1976 to 1980. And the trend seemed to be exacerbated along with the time. The risk of its investment would also be increased with the high leverage. Therefore, when the farm equipment market went into a down time, Massey was put at an unfavorable position.
And also the high leverage financing also limited the financing flexibility of Massey, most of Massey’s lenders are independently of one another and spread out among more than 100 banks over nine countries. A lot of these lenders own the covenants with the arrangement that if any single default occurred, substantially all long- and short-term debt will become callable. This type of limitation will impede Massey’s free access to the capital market. Thus, this made Massey have less financial option when they faced with the...