Massey-Ferguson Capital Structure Analysis Essay Sample

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1. Massey-Ferguson operates within the farm & industrial machinery and diesel engines industry. Success in this industry requires having a large Research and Development department to keep up with new technologies, concentration more in political and economical stable countries, and building strategic partners and contracts. A large part of the industry is heavily affected by interest rate fluctuations and the current state of the economy.

2. The market strategy of the Massey Corporation was to increase growth. Growth was achieved through large amounts of debt financing in business ventures that fell outside the core competency of the Massey Corporation. While growing, Massey failed to assess the impact of a market downturn. As a result, when the market began to slow so did Massey’s business ventures. The debt used to finance the growth carried interest payments that would not stop in cases of poor financial performance.

3. We feel that a predominantly equity capital structure would be the most beneficial for the Massey Corporation. Since their sales are affected by the market strength and interest rates, equity would allow for capital without the interest payments that may not be able to be made when the market is in a recession or interest rates are high.

4. The capital structure for Massey Corporation during 1976 is roughly 2 parts debt to one part equity. This does not appear to be the optimal structure because Massey is affected by market strength. When the market takes a downturn, sales and profitability of Massey is affected and interest payments will be harder to maintain. The reason for this capital structure may be the need for Massey to keep up with its competitors and the ease of obtaining debt financing. In relation to its competitors, Massey is heavily leveraged. John Deere has less debt in relation to the amount of equity. This may make them less susceptible to slower economies and benefit their corporation.

5. The large amount of debt that the company held was coming due and the continuing operations were not able to support the interest payments. This occurred for multiple reasons. The product market strategy for Massey was misaligned due to currency fluctuations. The United Kingdom is one of the net suppliers to the rest of the world yet as the British pound gets stronger it is bringing costs of production up relative to sales, which are in US dollars. Competitors, such as Deere and Harvester, are practicing a tighter product market strategy providing lower costs which results in higher margins for them. If Massey were to take the advice of their competitors and relocate capacity in a more concentrated market they would achieve similar cost advantages.

6. To maintain market presence in the short run they should focus on diesel engines and low horse power tractors. In the long run they should focus on developing a higher horsepower tractor to compete with John Deere in the North American market. It is most likely in their best interest to divest the unprofitable portion of operations and focus on their core competencies. A large amount of the future success of the company relies on the terms of the refinancing of debt and the investment in research and development. This is likely to work because their revenues can be sustained in the short term where the company already holds a strong market presence and start to focus on a higher margin product in a more lucrative market.

7. I would recommend that a large portion of the debt be reclassified into an equity interest. The recent news of help from the Canadian government should boost investor confidence and the likelihood that a rebound will be made. At this point a large amount of losses can be carried forward and be beneficial for taxes, where as debt would have no tax benefits at this time. If debt cannot be converted into equity then an agreement to suspend interest payments until the company becomes profitable would likely be the next alternative because the creditors would most likely acquire a majority interest in Massey- Ferguson.

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