Lecture11 - stakeholder theory massy ferg analysis

29 what went wrong after 1976

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Unformatted text preview: world afforded protection against political and other risks 26 Was This Corporate Strategy Reasonable? Exhibit 4 suggests that Massey’s strategy was very successful during 1971­1976: – Sales grow 22% per year – Roe was 13% in 1975 Not much compared to competitors, but Massey is building infrastructure in LDCs (investment) The big money is in Massey’s investment in market share in LDCs, as these markets develop and mature 27 MF’s Financial Strategy During 1971-76 Much higher leverage than competitors (exhibit 6) Massey had a target debt ratio of about 63% during 1971­76, and goes to 69% in 1977, 78% in 1978, 79% in 1979, 88% in 1980 (exhibit 4) Deere had a target debt ratio of about 30% (exhibit 6) Harvester had a target debt ratio of about 40% (exhibit 6) Note: both firms increase leverage in 1980 due to the recession Not much short­term debt, but have a fragmented, disorganized lending group instead of a centralized, organized lending group (is this important?) 28 Corporate & Financial Strategy Together Relative to its competitors, Massey chose an aggressive financial policy and an aggressive product market strategy Operated in a cyclical industry: big­ticket equipment which is interest­rate sensitive And pursued a risky corporate strategy: building infrastructure in financially weak, politically volatile LDCs Amplifying Massey’s business risk with financial risk was both unwise and avoidable Massey could have maintained a lower debt ratio by issuing equity more frequently (but this would have diluted fractional ownership by Argus, the principal shareholder) Lower financial risk would have offset product market risk; the success of product market strategies would have translated into gains for shareholders. 29 What went wrong after 1976? An external shock hits the industry and causes the industry’s worldwide collapse Increase in interest rates in the late 70’s Because tractors are big­ticket expenditures that require financing, high rates reduced sales dramatically High interest rates raised manufacturer’s costs Industry enters a large recession 30 Massey’s Response to the Crisis Major retrenchment program during 1978­1980 – – – – Sold peripheral assets Closed 24 plants Laid off a third of work force Reduced inventories But financial problems continued, since AR and interest expenses were eating cash – AR increased as financially weak customers were unable to pay for their purchases – AR were funded with short­term debt: short­term debt...
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