Masey Ferguson Case Study

5) How did Massey-Ferguson’s financing policy compare to its competitors in the degree to which it exposed the firm to increases in interest rates?

In opposition with its competitors, Massey Ferguson chose to finance its expansion and opportunities through short-term credit lines & substantial debt offering.

These choices were too extreme and had a negative impact. They were operating under such a high financial leverage (debt/equity) that the projects that they were undertaking were riskier that what was permitted by the industry standards, which should have been a red flag for management at the time.

International Harvester or Deere were operating which consistent lower leverage which would mean that inevitably if the outlook of the farming equipment would be negative and the industry would become weak, Massey Ferguson would be the first one to be affected.

Another financial policy that they adopted was the increasing use of debt financing which resulted in less financial choice.

The conditions in which they undertook debt were so limiting that they literally had no capital flexibility. E.g. their debt was so spread out (21 different banks in over 9 different countries). They had so many covenants that they were restricted to issue equity in 1998, which gave them very limited financial options.

They put a lot of emphasis on ST credit lines that exposed them more. With this type of strategy you plan for ST losses for gains in the LT but the problem was that the rise of interest rate completely asphyxiated their sales and increased dramatically their ST debt.