Driving in a new direction

December 13 1993

Driving in a new direction

December 13 1993

Driving in a new direction

It was a setting grand enough to match the host’s ego. Last week, Frank Stronach, the flamboyant founder and chairman of Markham, Ont.-based auto parts manufacturer Magna International Ltd., hired New York City’s venerable Metropolitan Club for a day for the first annual meeting his company has held outside Canada. About 200 shareholders and other guests registered for the gathering in the club’s marble Great Hall, and then filed through tasselled, red-velvet curtains into the West Lounge. There, under a ceiling covered in gold-trimmed frescoes, Stronach vowed that the excessive borrowing and financial mismanagement that almost sank Magna during the 1980s are now behind it. The crowd listened patiently as Stronach and his executives insisted that, from now on, Magna will pursue a policy of “disciplined growth.” If Stronach was struck by the irony of denouncing excess in such lavish surroundings, he did not show it. “We will be a standout in the years to come,” he enthused. “Number one in the world.”

Given Magna’s soaring fortunes, shareholders appear to be more than willing to let Stronach say whatever he wants. Three years ago Magna was losing money for the first time in its history and was saddled with more than $1 billion in debt. Nervous bankers were pressuring Magna executives

to break up the company and sell off its most profitable divisions. The mercurial Stronach sat on the sidelines as a rescue team of expert negotiators fought for some breathing room from the bankers. They succeeded. Since then, Magna has wiped out its debt and roared back to profitability despite a prolonged slump in the North American auto-

mobile market. The company’s sales for the year that ended on July 31, 1993 climbed by 10 per cent to $2.6 billion. Last week, Magna reported a record $47.1-million profit for the first quarter ending on Oct. 31. As well, its stock has soared to $60.25 a share from a low of $2 a share in November, 1990. And after three years of painful cost-slashing and restructuring, Stronach, 61, is talking

about big expansion plans once again. ‘We are not a Canadian company,” he boasted. We are a global company.”

The focus of that expansion at the moment is Europe. In September, Magna bought a 60per-cent interest in a German air-bag and steering-wheel manufacturer for $60 million, and 12.5-per-cent interest in its parent company, which makes aluminum engine blocks and pistons, for $40 million. To finance those purchases, Magna issued $151 million of new stock at $50.50 per share which investors snapped up within days. In October, Magna agreed to buy a 74-per-cent stake in a European rearview mirror manufacturer. In the past, Magna has bought machinery in Europe, and operated five small factories there. Now, Stronach says that he wants to expand Magna’s production facilities, and is shopping for European bargains. Stronach added that he now spends about half the year in Europe, mostly in Germany, Switzerland and his native Austria.

But although Stronach still likes to talk in grand terms-and to stage lavish annual meetings-he is, in many ways, more subdued now than he was during the company's heady growth in the 1980s. He retains the top job at Magna, and 61.9per-cent control of the com pany with special shares

that carry 500 votes each. However, in an in terview this fall, he explained that he is "less involved in the day-to-day things." At last week's annual meeting, Stronach paid trib ute to "a great report" to shareholders by "a great team," and praised Magna's "great di rectors." Then other executives moved quickly to the microphone to answer any de tailed financial questions from the floor. Stronach, who would like to be taken seri ously as an economic theorist, still muses in interviews about Magna's corporate Charter of Rights and its Fair Enterprise System, a combination of profit-sharing and production incentives for company employees.

Stronach has also reaped huge personal

After a major restructuring, Magna gains global ground

financial rewards from the system. Last year he earned $5 million in salary and in bonuses. But Stronach points out that most of his compensation is tied to Magna’s profits and, through a stockoption plan, to its share price—he only makes money if Magna and its shareholders make money. And

at last week’s meeting, none of the shareholders present questioned him about his salary or the $12 million he borrowed from the company last year.

Both Stronach’s business philosophy and his drive to succeed stem from his early experiences, rather than from formal schooling. Born in Weiz, Austria, Stronach left school at age 14 to begin an apprenticeship as a tool-and-die maker. He immigrated to Canada in 1954 with just $200 and formed a small auto-parts company of his own in 1957. Over the next two decades, he built it into a $150-million-a-year business. The management structure was radical at the time: a loosely affiliated group of small factories, many of them run by skilled European-born tradesman, with plant managers and employees entitled to a share in their factory’s profits. By the mid-1980s, when Magna’s annual sales soared to more than $1 billion, the system appeared to be working perfectly.

Flush with his success, Stronach relinquished many of his management responsibilities at Magna and plunged into politics. He ran unsuccessfully as a Liberal candidate in the 1988 federal election, promoting fair

enterprise as a cure for the Canadian economy. Stronach dallied with other sidelines as well. An avid tennis player, he founded a sports clothing company. He also launched Vista, a shortlived business and lifestyle magazine. As well, he opened Rooney’s, a kitschy mid-town Toronto disco that catered to the city’s power-suit and hairgel set. Stronach still bristles when questioned about how much of a drain those ventures were on his time and Magna’s finances. “That was blown completely out of proportion,” he says.

However, Stronach concedes that when he returned to Magna’s head office the day after the election, he found the company’s finances in a shambles. As well, he says that he realized then that Magna’s decentralized management structure was unsuitable for such a large

company. Furthermore, he says that many young managers were too eager to prove themselves, and had borrowed too much for new machinery or other ventures. Said Stronach: “The customers kept pushing work to us, saying ‘Can you do this?’ Our managers said ‘Yes,’ and the banks said, ‘Money’s no problem.’ ”

But by early 1989, Magna’s corporate debt load was approaching $1 billion. Stronach began slashing costs—dismissing middle managers, closing executive dining rooms and selling two of Magna’s three corporate jets. He also delegated authority for the negotiations with the banks, as well as many of Magna’s day-to-day operations, to a special management team led by chief financial officer David Copeland, and accountant and vice-president of corporate development James Nicol. In early 1991, they won approval from debt holders for an elaborate debt-restructuring plan.

For Stronach, however, the turning point occurred in May, 1991, when he flew to New York and convinced investors to buy $100 million (U.S.) worth of bonds convertible in-

to Magna stock at $10 a share. Last week, he praised those investors for their foresight. “New York stepped forward first,” he said. “And I’ll always remember that.” But investors and analysts still had doubts about both Magna and Stronach. When Copeland and Nicol left Magna in October, 1992, the company’s share price nose-dived by $7 within a few hours, to $22. However, it bounced back quickly and has climbed steadily ever since.

Industry analysts attribute Magna’s swift comeback to a combination of luck and smart management. Overall, North-

American automobile sales are starting to recover after a four-year slump. But all through that slump, the Big Three domestic vehicle manufacturers—General Motors, Ford and Chrysler—have been closing their own costly parts departments and contracting the work to outside suppliers such as Magna. As well, the expansion that Magna financed with its heavy borrowing in the 1980s has left it with more up-to-date and efficient plants than many of its competitors. Magna also added more sophisticated product lines. Analyst Dennis DesRosiers, president of Toronto-based DesRosiers Automotive Research Inc., said that a key turning point for Magna was winning the contract in 1990 to build the seats for Chrysler’s popular Magic Wagon mini-vans, built in Windsor, Ont. Before that, says DesRosiers, Magna was predominantly “a metal-basher and a plastic-injection moulder”—stamping out fenders, bumpers and other simple parts.

However, even though Magna is growing once again, Stronach warns that Canada may reap few of the benefits from that expansion. The company operates 45 plants in Canada,

down from 70 in 1989, with most of them clustered north of Toronto. Its Canadian workforce is 10,000, down from 12,000 in 1989. Stronach complains that high taxes and excessive regulation are scaring away investors. Said Stronach: “If you’ve got some money in Canada, why would you dig a foundation, put up a building, buy machines, hire employees and cope with the bureaucratic environment if you can buy government bonds?” He adds that he maintains many of his operations in Canada only because of a strong sense of obligation to long-serving employees.

Even in his own backyard, Stronach com-

plains that he is running into bureaucratic roadblocks. In September, he presented a plan to build a new Magna headquarters and a housing subdivision on his 700-acre farm to the town council of Aurora, a suburban town north of Toronto. Local planning officials have held up the development. To Stronach, the delay is typically Canadian. He added that, in the United States, “they would give the kids the day off school and have brass bands and big banners that said, ‘Welcome Magna.’ ”

Stronach also gets a little testy when questioned about his personal life, Aside from tennis, his big gest passion is horse rac ing. Stronach owns about 50 thoroughbreds, and is the leading owner in Ontario this year, with $1.7 million in purse winnings. He also spends many of

his Saturdays babysitting his two-year-old grandson, Frank. But Stronach declines to answer questions about his wife, Freida, and their two children. Stronach’s daughter Belinda, 27, who is married to Magna president Don Walker and sits on the company board herself, had their second child, a daughter, last month. Said Stronach of Walker: “I thought of him very highly even before he knew my daughter.” Stronach’s son also works for Magna, but he will not divulge any more than that.

Stronach warms when the conversation turns back to economics and politics. He says he became disenchanted with the Liberal party soon after the 1988 election and voted Reform in the Oct. 25 election. “They are less brain-dead than the other parties,” he said. But now that Magna is back on track, Stronach says that he wants to form a “free enterprise think-tank.” Although he has made more money than many tycoons can even dream of, his ambitions still extend far beyond the auto industry.

JOHN DALY with MOIRA DALY in New York City