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Opinion: Deere slims down to keep ahead of Agco

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Two-wheel drive vehicles are usually quicker than four by fours. As Robert Lane may be thinking. In reducing Deere &Co to two divisions, the tractor maker's chief executive has lost muscle but, potentially, gained fleetness of fender. He may need it to keep ahead of his arch rival, Agco.

Agco has been playing catch up. Sure, investors still attribute a certain polish to Deere's green and yellow livery. The group trades at a multiple of 5.6 times this year's earnings before interest, tax, depreciation and amortisation, a whopping 30% premium to Agco's.

But Agco shares, after underperforming for much of last year, have the advantage in 2009.

That may reflect an edge in operating performance. Deere admitted last week that tractor sales throughout the range had underperformed the industry average in March. It may be that farmers, at least, are prizing the keener prices often managed by Agco's Massey Ferguson brand.

How deep?

Mr Lane looks to be applying his scalpel in the right place. Deere's Commercial and Consumer Equipment division is proving more vulnerable to recession than the core Agricultural powerhouse and even the flagging Forestry division. And there is a case for lumping the smaller tractors in with the bigger ones. It should give them a broader potential audience. And at least farm incomes are looking up, unlike golf club memberships.

The question is how deep he goes. Mr Lane neglected to say how much his surgery would save in running costs. But his group has some way to go to match Agco on efficiency. Deere would have to cut more than $340m a year off its running costs to get its sales and administration expenses to the 8.4% of revenues that Agco achieved last year.

That would require some going. James Field, shifted from head of Commercial and Consumer Equipment to take charge of group cost cutting, may need all the horsepower he can muster to fare better in his new job than he did in his last.

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