Massey Ferguson Ltd Case Study

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QUESTION 3

Assess the various alternatives at the current stage of Massey’s difficulties. What options are available for alleviating Massey’s financial problems?

The following will assess the various alternatives of Massey’s stages of difficulties:

- cut labour

Due to massive lost in between 1978 and 1980, Massey reduced its labor force from 68,000 to 47,000 employees. This alternative has advantages and disadvantages. By cutting amount of labor force, Massey can reduce its overhead costs (salaries, benefits, and insurance). With the extra budget for labor hiring, Massey could hire new part-time labor and motivate high-performing employees by compensation. Besides that, reducing employees could also help Massey to save more capital to keep the company running. However, this strategy might raise uncertainty job-security issue. Employees that feel uncertainty will cause poor job performance. Then, cutting large amount of labor will cause the rumors of Massey’s bankruptcy and thus, the company image and share price would decrease.

- cut manufacturing space

In the case study, Massey reacts to the massive loss by cutting its manufacturing space from 30 million sq. ft. to 20 million sq. ft. The advantages of reducing manufacturing space are save cost (cost for renting and utilities), and avoid waste of space. Massey can avoid waste of space by 10 million sq. ft. due to reduction in demand. By reduce the manufacturing space, Massey could save costs for rental and also utilities bills.

- reduce inventories

By reducing inventories can alleviating Massey’s financial problems. Inventories is the raw material used to make the firm’s product, goods in process, and finished goods that are ready to sale (Titman, Keown, & Martin, 2011). As we know, if the company have too much inventories and not have an ability to handle this inventories it will give a problem for the company. This is because inventories need to sale or finished quickly and cannot be stored for the long times. It can give a high cost for the company and add other cost also. By reduce inventory can reduce cost of company in term of operation cost. Based on this case study, if Massey wants to reduce the cost of operation they can reduce the inventories and also can reduce company debt as well.

- eliminate unprofitable operations

In 1978, Massey had eliminated its unprofitable operations such as office furniture, garden tractors and construction machinery due to the problems that was explained in question 2 which all of it caused loss in Massey’s company. Besides that, Massey also eliminates its Hanomag subsidiary that was not profitable to the company to IBH Holdings. Eliminating unprofitable operations is a good idea as by running the operations would just incur a lot of cost where else it does not contribute profit for the company. By having the operations it will just cause further loss towards the company. The act of eliminating unprofitable operations contributed towards and increase of its sales from US$2,925.5 million in 1978 to US$3,132.1 million in 1980. That is an increase of 7.06 percent in that three years. Furthermore there an increase of net income from 1978 to 1979 (US$37.0) however, in 1980 the company faced a loss in net income for US$225.2.

- close plants

In order to alleviating Massey’s financial problem the company need to close their plant that basically not give a high profits for them. For example, Massey’s can close the plant in Argentina and Brazil due to decline in farm machinery sales, decline in North America farm prices and incomes, poor weather in western Europe and also high interest rate. By close plants for those areas that unprofitable operation in manufacture of office furniture, gardens tractor, and construction machinery can resolve Massey’s financial problems. It also can reduce the operation cost by reduce number of plants.

The options available for alleviating Massey’s financial problems are as follows:

- Seek for government’s help to bailout

According to Cambridge Dictionaries, government bailout is the action of government to save a company from bankruptcy or liquidation by giving loans to the company (Cambridge Dictionaries, n.d.). One of the options to reduce Massey’s financial problem is seeking help through government bailout. This is an option to avoid bankruptcy. To gain government bailout, Massey needs to give Canada bank bailout fund something valuable in return. General Motor (GM) used this option in December 2008. Federal Government of USA used bailout funds to save the company from bankruptcy. In return, GM agreed to give warrants for common stock, preferred stock and promise to pay the loan in 2012 (Amadeo, 2012). Similar to GM, Massey could issue common stock, preferred stock to Canada bailout fund bank, and give a promise to repay the loan in an estimated year. Massey is a strong machinery and diesel engines producer, they had thousands of labor force and they are one of the taxes contributor. If the company announces bankruptcy, it will cause thousands of unemployed and government’s loses of taxes. To convince the government, Massey could use these points to strengthen its reason for need of bailout funds.

- equity issue

Preferred stock and common stock

Massey-Ferguson Ltd should preferred stock and common stock in order to alleviating Massey’s financial problems. Preferred stock refer to an equity security that holds preferences over common stock in terms of the right to the distribution of cash or dividend and the right to the distribution of proceeds in the event of the liquidation and sale of the issuing firms (Titman, Keown, & Martin, 2011). Common stock is a form of equity security that represents the residual ownership of the firms (Titman, Keown, & Martin, 2011). By prepared preferred stock and common stock can help this company to solve financial problems and also as their options. As we see in this case study we found that Massey had issues two preferred stock outstanding which is series A and B. Every preferred stock has a liquidation value of $25 per share and also pays the dividend issues $2.50 per share. This company purpose of each issues to reduce company short term debt. So, in order to resolve financial problem they need to issues preferred stock and common stock to sell to the other investor