Agco Corp. Business Information, Profile, and History

History of Agco Corp.

AGCO Corp. is a major global manufacturer and distributor of tractors and other farm equipment. Through its extensive dealer network, AGCO builds and distributes products under brands that include AGCO Allis, GLEANER, Hesston, White, and Massey Ferguson, among others. AGCO achieved explosive growth during the early 1990s through savvy business management and by acquiring competitors.

Although AGCO itself was not created until 1990, the company boasts a rich history of success and innovation in the farm machinery industry. In fact, AGCO is the successor to Deutz-Allis, which was formed in 1985 when Klockner-Humboldt-Deutz AG purchased the agricultural unit of Allis-Chalmers Corp. In 1990, Klockner spun off Deutz-Allis to a group of executives who formed AGCO. Thus, AGCO is effectively the offspring of the renowned Allis-Chalmers Corp.

The Allis-Chalmers Corp. was the progeny of an American named Edward P. Allis. Allis was born in New York in 1824 and graduated from Geneva College in 1845. After college, Allis and a friend, William Allen, moved to Milwaukee, Wisconsin, where they opened the Empire Leather Store. This venture was a natural progression for Allis because his family was already involved in the leather business in that area. Through either sheer luck or great foresight, Allis sold his interest in Empire Leather shortly before the Financial Panic of 1857. A number of businesses, including Empire Leather, failed during the economic downturn. For the cash-rich Allis, the disaster was an opportunity. In 1861, he used his savings to purchase the financially troubled Reliance Works at a Sheriff's auction. Reliance Works was a leading manufacturer of sawmills, flour milling equipment, and castings. Before 1857, Reliance had been one of Milwaukee's largest employers with a payroll of about 75 men.

During the 1860s, Reliance Works of Edward P. Allis & Co., as the company was called, employed about 40 men working 55 hours per week. Allis constructed a new plant in 1868, and one year later he purchased his biggest rival, Bay State Iron Manufacturing Co. The company enjoyed strong profits until the Financial Panic of 1873, during which Allis went bankrupt. Chiefly due to the goodwill and faith of his creditors, Allis successfully renegotiated his debt and eventually recovered from the depression. The company remained intact, and even enjoyed a period of strong growth during much of the 1880s. By 1889, Allis employed 1,500 workers and shipped about $3 million worth of equipment annually. Allis died on April 1 of that year. He is still recognized as a pioneer in several machinery industry segments.

A number of gifted inventors and managers contributed to Allis's business efforts during the late 1800s. George M. Hinkley, for example, was a talented engineer and salesman who joined Allis in 1873. Among his most notable inventions was the bandsaw, which replaced the circular saw in many milling applications. The innovation was credited with revolutionizing the logging industry at the time, and the great demand for the saw helped the Edward P. Allis Company achieve a global presence in the machinery industry. Throughout his career, Hinkley accrued 35 patents on a wide range of sawmill machinery and accessories. Other notable Allis Company inventors included William Dixon Gray, who invented important new milling devices, and Edwin Reynolds, a pioneer in steam engine technology.

After Allis's death, his company continued to introduce breakthrough machines to the industry, particularly steam and pumping equipment. By the turn of the 20th century, the Edward P. Allis Company was the largest supplier of steam engines in the world. In 1901, Allis merged with another prominent machinery manufacturer, Fraser & Chalmers, to form Allis-Chalmers Company. Chalmers brought several new lines of machinery, particularly mining equipment, to the newly formed group, giving Allis-Chalmers a comprehensive product line. Further acquisitions during the next few years significantly broadened the company's product offerings, and Allis-Chalmers (the name was changed to Allis-Chalmers Manufacturing Company in 1913) continued to enter new machinery industries throughout the coming decades. Of greatest import to the history of AGCO was Allis-Chalmers's foray into the farm tractors market. Allis-Chalmers made many significant contributions to the farm machinery industry during the 1920s and 1930s, although its participation in that burgeoning market was dwarfed by competitors like International Harvester and John Deere.

Although it trailed a few industry leaders, Allis-Chalmers was recognized as a major U.S. manufacturer of farm equipment following its acquisition of Advance-Rumely Thresher Co. in 1931. The company parlayed its legacy of innovation into substantial gains with the division, introducing the first rubber-tired tractor in 1932 and, a few years later, a machine called the "All-Crop" harvester, which eventually eliminated the grain binder and threshing machine. One of the company's most profitable early innovations was the color it chose for its tractors--orange, in contrast to the industry-standard green. That move, devised by Allis-Chalmers's clever tractor division manager, Harry Merritt, proved to be a savvy publicity gimmick. The company's distinctive bright orange tractors eventually dotted the American landscape and became an excellent advertising tool.

During the 1940s and 1950s, Allis-Chalmers's farm machinery division assumed an increasingly prominent position within the company's many product groups. Ongoing innovation, such as the landmark multiple V-belt drive (Texrope drive) which the company introduced in the 1940s, spurred steady growth of the agricultural unit. To compete more effectively within its various markets, the company reorganized into separate tractor and general machinery divisions in the 1950s and several non-farm equipment lines were gradually phased out. Simultaneously, the company moved to expand its presence in foreign markets with the creation of Allis-Chalmers International. By the early 1960s, Allis-Chalmers operated factories in Mexico, Australia, England, France, and several other countries.

During the 1960s and early 1970s, Allis-Chalmers Corp., as it was named in 1971, experienced turbulence in several of its key markets. Fortunately, demand for agricultural equipment boomed during this period, and the company was able to offset losses in other areas with sales of tractors and other farm machinery. Despite the success of the agricultural division, general mismanagement and faulty strategy resulted in huge overall losses for the company. To make matters worse, the demand for farm equipment dropped significantly in the late 1970s. Battered by years of poor planning and a sagging economy, Allis-Chalmers's executives began searching in the early 1980s for a way to bring capital into the cash-starved organization.

During this period, Allis-Chalmers's farm equipment division became so depressed that the company was forced to close down its tractor and combine production plants for three months in 1984. This move stunned long-time Allis-Chalmers employees, many of whom were laid off. Desperate for cash and impatient with agricultural markets, Allis-Chalmers executives reached an agreement within six months of the shutdown to sell the farm machinery division. In 1985, the Allis-Chalmers Agricultural Equipment Co., along with a related credit subsidiary, was sold to Klockner-Humboldt-Deutz AG (KHD) for approximately $132 million and other consideration. At the time, the division was producing about $260 million in annual sales. KHD combined the new purchase with its established Deutz Farm Equipment subsidiary to create a new company called Deutz-Allis Corp.

Between 1985 and 1989, KHD labored to cut costs and restore profitability to the ailing Deutz-Allis Corp. It closed down U.S. tractor production facilities and began relying solely on its imported German-built tractors. However, KHD continued to operate the Allis-Chalmers combine manufacturing facility in Independence, Missouri, and even invested about $8 million in capital improvements at the plant. Importantly, KHD drastically reduced the number of equipment dealers from about 1,800 to just 800 and slashed its U.S. work force from more than 1,800 to just 900. The company also eliminated some unprofitable product lines and worked to reduce unnecessary operational costs. The effort succeeded in reducing Deutz-Allis's losses from about $82 million in 1987 to just $1.9 million in 1989.

Despite these noteworthy gains with its new Deutz-Allis unit, KHD was disappointed with the performance of its U.S. farm equipment operations. Importantly, the company had underestimated the loyalty of American farmers, many of whom were World War II veterans, to U.S.-built machinery. One of the Deutz-Allis gleaners, for example, was nicknamed the "Kraut Can" by import-wary farmers, despite the fact that the machine was built in Missouri. By 1989, KHD had tired of its Deutz-Allis experiment and was ready to sell the division. Robert Ratliff, the head of Deutz-Allis in the United States, recognized the company's potential; along with a group of fellow executives, Ratliff arranged to purchase the division by selling off Deutz-Allis receivables and using the money to finance a management buyout. Ratliff's management group completed the acquisition of Deutz-Allis in 1990 and renamed the company Allis-Gleaner Corp., or AGCO.

Ratliff was well acquainted with both AGCO's operations and the machinery industry when he took control of the company. He had worked at Uniroyal and at International Harvester, where he headed the truck group, before KHD hired him in 1988 to turn around the ailing Deutz-Allis. Upon purchasing the company, he and four other executives, with the help of investment firm Hamilton, Robinson & Co., moved quickly to assume control of the $200-million-per-year equipment manufacturer. "We never looked back," Ratliff recalled in the October 30, 1994, Topeka Capital-Journal. Ratliff and his partners moved AGCO's headquarters to Atlanta, Georgia, where the company could get a clean start by taking advantage of strong transportation and labor markets. Among other changes, they brought back the distinguished bright orange color to the farm equipment, which KHD had previously jettisoned in favor of dark green.

In the early 1990s, AGCO executives launched an aggressive plan to cut costs and increase efficiency. More importantly, they devised an ambitious strategy for growth. In 1991, Ratliff went to his home state of Kansas to negotiate the purchase of Hesston Corporation, a small hay handling equipment company with an excellent reputation for quality but a long history of financial problems. Founded by a group of Mennonite farmers, the company prospered for a short time before giant round-balers were introduced to the industry. Hesston was then purchased by Fiat, of Italy, which achieved uneven success in attempting to turn the company around. Ratliff believed that his team stood a better chance of reviving the company. A few months after the Hesston purchase, AGCO bought the White Tractor division of Allied Products. The acquisition of both Hesston and White Tractor not only rounded out AGCO's product line, but it also added 1,100 dealerships for the distribution of AGCO's existing machinery.

The Hesston and White Tractor acquisitions provided an insight into Ratliff's long-term profit strategy for AGCO. He realized that AGCO would be fighting an uphill battle if it was going to try to compete with manufacturing giants like John Deere and J.I. Case. "You've got 70 percent of the industry in North America controlled by two companies ... neither of which has made money for a number of years," explained Allen Ritchie, head of AGCO's acquisition team, in the May 1994 issue of Georgia Trend. "[Those] businesses were really being driven by the manufacturing side of the business--low cost production ... and nobody won." Thus, instead of profiting by building more farm equipment, AGCO hoped to succeed by beating Deere and Case in the marketing and distribution arenas. To that end, AGCO executives planned to concentrate on building a comprehensive, efficient network of dealers that could supply an expansive, reputable product line.

AGCO paid $36 million for both Hesston and White Tractor, financing each deal by selling more receivables. To help stabilize the ballooning organization, Ratliff hired John Shumejda to serve as chief operating officer. Shumejda was an engineer and an expert at farm machinery technology. While Shumejda worked to streamline AGCO's manufacturing and distribution operations, Ratliff and Ritchie continued to make acquisitions. In January 1993, AGCO paid $94.8 million to Varity Corp. for the assets of farm-tractor giant Massey Ferguson's North American operations. This move represented a major coup for AGCO in that Massey added 1,100 new dealers to AGCO's network and $200 million in sales. In addition, AGCO bought a related credit company for about $45 million which became a primary profit center for the corporation. Later that year, AGCO acquired White-New Idea for $53 million. This baling equipment manufacturer added $83 million to AGCO's revenue and tagged 300 new dealers onto its burgeoning network.

By mid-1994, AGCO had established itself as the top North American distributor of tractors and a leading distributor of a wide range of farm machinery. Its giant distribution network had swelled to include 2,600 dealers, compared to John Deere's 1,400. AGCO was selling 20 different tractor models under the AGCO Allis name, four different GLEANER combines, 11 White tractors, and a range of equipment marketed under the names of Massey Ferguson and other brands. Although AGCO's debt burden had increased significantly, sales rocketed from about $220 million in 1990 to $314 million in 1992 and then $596 million in 1993. More importantly, AGCO's net income bounded to a healthy $34 million in 1993 (including a $14 million charge related to the Massey Ferguson buyout).

In 1994, AGCO transformed itself from a mid-sized North American farm equipment company to an international industry leader when it paid the equivalent of about $330 million for the international operations of Massey Ferguson. Prior to the buyout, only about two percent of AGCO's revenue came from outside North America. That figure shot up past 50 percent after the sale, giving AGCO immediate access to 140 different countries where Massey Ferguson was active. Furthermore, the giant division more than doubled AGCO's revenues, which surged in 1994 to an impressive $1.32 billion, about $76 million of which was net income. Going into the mid-1990s, AGCO continued to cut costs, particularly in its foreign operations, and to enhance its distribution network. It was the fourth largest farm machinery distributor in the world and was selling its machines and parts under seven different brand names. Improving agriculture industry dynamics, combined with AGCO's proven marketing and distribution strategies, gave the company a foundation for long-term growth.

Principal Subsidiaries: AGCO Allis; Agrecredit Acceptance Company; GLEANER; Hesston; Massey Ferguson; White; White-New Idea.