Lecture11 - stakeholder theory massy ferg analysis

Refinancing whygivethelendersequity

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Unformatted text preview: leverage was high, the opportunity to expand was good. So it issued short­term debt and successfully took it. In 1981 it issued equity for $172 million. With the proceeds it retired short­term debt, reducing its debt ratio to 33%. Deere begun 1981 with renewed debt capacity and competitive flexibility. Its competitors remained in distress. 36 Main Issue That Arises in the Case The key problem with a debt ratio that is too high for the risk level embedded in a firm’s product market strategy Such a firm is vulnerable to economic adversity and competitive attack Constrained by financial distress, Massey could not respond to Deere’s aggressiveness in North America (and similar policies by Japanese and Korean competitors in foreign markets) An important cost of financial distress, especially in concentrated markets, is the permanent loss in competitive position and market share 37 Massey’s Financial Options: Merger But Massey is unlikely to attract a merger offer. While the company appears cheap ($100 million in October), the buyer must assume a huge debt load. In addition, to make the company viable again requires a substantial investment in additional funds. Finally, the firm’s competitive position and its potential value have been diminished by the advance of Deere in North America and Japanese and Korean firms in foreign markets 38 Massey’s Financial Options: Liquidation Not more attractive. If banks pull the plug, they would find little liquidation value on Massey’s balance sheet. – Receivables are owed by financially weak customers – Cannot sell inventories in the current industry situation – Could sell Perkins Engines, Massey’s U.K. diesel engine subsidiary, but not enough to repay debt In addition, bankruptcy will be very costly, leaving nothing for creditors: – Debt is owed to 150 lenders – Assets are spread over 30 countries 39 Massey’s Financial Options: Refinancing Seems to be the only way to improve financial condition On the operating side, the firm needs to shrink its businesses and market commitment to a viable core To allow the firm to restructure its operations, the financial pressures paralyzing the firm must be relieved: – Massey cannot service interest payments – Nor it can repay short­term debt and meet near­term principal payments Lenders must fac...
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