Massey Ferguson Case: Concepts Of Value And Risk

COLOGNE BUSINESS SCHOOL (CBS)

Case study Analysis:

Massey Ferguson

Term paper for “Concepts of Value and Risk”

Winter Semester 2014

Lecturer: Remer Laxmi

Trinh Chau

Bachelor Exchange student program

Student-No. 1149099010

Contents

1. PRODUCT MARKET STRATEGY AND FINANCIAL STRATEGY 1971-1976 1

1.1 Product market strategy 1

1.2 Financial strategy 1

2 FINANCIAL DIFFICULTIES AFTER 1976 3

2.1 Problem 3

2.2 Response of Massey Ferguson and competitors 4

2.2.1 Massey’s response 4

2.2.2 Competitors’ responses 4

2.3 Consequences for Massey 5

3 RISK PROFILE 6

3.1 Cash flow 1978-1980 6

3.2 The influence of interest rate on cash flow 8

3.3 Change of farmers’ income on cash flow 8

3.3.1 Most likely response of customers to Massey’s financial difficulties 8

4 RISK MANAGEMENT STRATEGY 9

5 REFERENCES 11

6 APPEDICES 11

PRODUCT MARKET STRATEGY AND FINANCIAL

Particularly, international business expansion was partially to help hedging interest rate risk, recession risk and inflation rate risk, because diversifying markets might help the company maintain its performance during domestically adverse economic conditions and vice versa. Besides that, tax rate risk was to be hedged through financing by debt. Debt financing offers the lowest cost of capital due to its tax deductibility, so Massey financed by debt to avoid additional tax payments, for when tax rate increases, cost of debt would decrease which results in the reduction in cost of capital.

However, the company made a big mistake in its risk management strategy. Rather than being more conservative like its competitors, Massey’s management was too aggressive to boost growth rate by borrowing money to grow faster. It was financing too much by debt and neglecting the credit default risk which made bankruptcy risk become higher. For this significant mistake in the capital structure, the other risks, therefore, could not be mitigated