August 29, 2007
In the end, the fear factor overwhelmed the Frank factor.
Frank Stronach's deal with Oleg Deripaska is going ahead - despite the questions about the mysterious Russian oligarch, the unusual power-sharing agreement between the two men, and the millions of dollars Mr. Stronach and five key Magna executives will get from this deal. It was done efficiently, in a shareholder meeting that lasted barely 20 minutes and during which not a single dissenting word was spoken. A bit like a Soviet-style, rubber-stamp legislature, come to think of it.
So one of Canada's most important manufacturers, which gets more than half of its $24-billion (U.S.) in sales from Ford, General Motors and Chrysler, will soon be partly controlled by a man who would be forbidden from crossing the Ambassador Bridge into Detroit. How did that happen?
"I'm actually shocked," said one Magna investor who was in the "no" camp for yesterday's vote. "What did we miss?"
What he missed, perhaps, was other investors' sense of fear - perhaps frustration would be a better word - about the company's prospects. Not that there's anything so terribly wrong with Magna: It is profitable, growing, and financially sound. But its future seems less rosy than the past, because ... well, because more than half of its sales come from Ford, GM and Chrysler. Another 30 per cent, approximately, comes from BMW and what remains of DaimlerChrysler, namely Mercedes.
All told, 99 per cent of Magna's revenue is generated in North America and Western Europe, and the future of auto manufacturing belongs to neither. It belongs to Asia.
A decade ago, India was still developing its first fully homegrown passenger car, the Indica. Today, Tata Motors is plotting a no-frills vehicle for less than $3,000, which, if it works, could entice the Indian middle class to cast aside its mopeds en masse. India still has one of the lowest rates of car ownership in the world. So does China.
But the bigger threat to Magna's business is the prospect of cheap, quality cars made in China and exported to the world. Chrysler is working with China's Chery Automotive on a venture that could see small vehicles land at U.S. dealerships in 2010. Unless you've been living under a rock for the past 10 years, this should not come as a surprise.
It would be unfair to say that Magna executives were caught napping. But it would be inaccurate to say they've managed to capitalize on the trend. Magna is nowhere in India, admittedly still a tough country to do business in. It has been building factories in China quickly - it had 11 as of the start of this year, plus a handful of centres for R&D and engineering. But those revenue numbers tell you that progress with Asian customers has been slow. Nor has the company been able to make great strides in squeezing more business out of Toyota, one of the key tasks of Mark Hogan when he was hired as president in 2004.
While China and India were heating up, what was Magna's executive team doing? Spending its energy in Europe and on financial manoeuvres - the spinoff of various units (Tesma, Intier, Decoma), which were later brought back into the fold; Mr. Stronach's foray into horse racing; later, the spinoff of that business and Magna's real estate arm. There were all kinds of distractions. Whatever the reason Magna missed the auto boom in emerging markets, it needs to get in, and soon.
Enter Mr. Deripaska, who conveniently controls one of the two groups that dominate vehicle manufacturing in Russia. If you're going to do business in that country, few could argue that a friend of Vladimir Putin is the wrong guy to do it with. But that was no excuse for some of the more offensive aspects of the deal, like the $150-million payment to Mr. Stronach or the millions in extra dividends for senior management.
Minority shareholders were given a rare chance to flex their muscle and extract something better. They had the power to veto this arrangement and could have used that threat to force the company to add a so-called "coattail" provision, which would ensure equal treatment for all shareholders if there's ever a takeover. Instead, they chose to roll over and accept what they were given, without getting any governance improvements in return.
So here's a prediction about how this will play out. Russia will prove a modest success - but only a modest one - for Magna. When Mr. Stronach dies, Mr. Deripaska will make his play for control. He'll offer a large premium to buy the multiple-voting shares owned by management and the Stronach family. He'll offer the class A minority shareholders nothing, because he doesn't have to offer them anything.
Those shareholders will jump up and down and curse and say they're getting screwed. But they'll deserve little sympathy; they had a chance to try to do something to improve their rights as owners, and they passed. Fear made them do it. Turns out they believed a future without their new Russian partner would be worse than one with him.
No comments:
Post a Comment