Frank Stronach goes to Florida

By Tamsin McMahon - Thursday, March 8, 2012 at 8:20 AM - 0 Comments

The city of Ocala, Fla., was known as the Gateway to the Magic Kingdom until Disney closed its welcome centre six years ago. These days, the local newspaper has given it a new nickname: The Land of Stronach.

Since his exit from the helm of Aurora, Ont.-based auto parts giant Magna International, Frank Stronach has turned his attention away from the auto industry and toward the greener pastures of Florida cattle ranching. In the past two years, the 79-year-old has been on a buying spree, using nearly $80 million of the $856-million payout from selling his controlling stake in Magna to acquire huge swaths of land in the Sunshine State.

So far, Stronach has amassed about 70,000 acres—nearly three times the size of Disney World—making him Marion County’s largest private landowner. His plan is to open a massive grass-fed beef operation starting early next year, with as many as 30,000 cattle, a 61,000-sq.-foot abattoir that would slaughter up to 300 cows a day, and a biomass power plant that would extract methane from manure.

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Canada’s greediest man?

By Chris Sorensen - Monday, June 28, 2010 at 10:45 AM - 40 Comments

Rolf Vennenbernd/ZUMA/KEYSTONE PRESS

For much of the past decade, the annual meetings of auto parts giant Magna International followed a rhythm as familiar as it was frustrating: a handful of shareholders would stand up and express outrage at founder and chairman Frank Stronach’s hefty annual pay packages; the Austrian-born Stronach, with the squinted eyes of a gunslinger at high noon, would respond by effectively telling everyone to go to hell. In 2003, for example, Stronach bluntly told reporters “I should get more” when asked whether he deserved the $58.1 million he pocketed a year earlier.

The following year he offered his personal philosophy on why company founders should continue to receive rich pay packages even if they’re no longer occupying the job of CEO—it helps foster an entrepreneurial spirit, he explained­—but not because he felt the need to justify himself to critics. “I could say, ‘Look, if you don’t like it, sell your shares. It’s a free country.’ ”

That, more or less, was where the debate ended every year, much to the chagrin of corporate governance types. Stronach has been criticized for essentially milking the company he founded with the board’s acquiescence. His average annual take-home pay over the past decade was over $41 million, much of it in the form of so-called “consulting fees” calculated as a percentage of Magna’s pre-tax earnings. In 2007, at the peak of the market, he hit a personal best of $70 million. (The next best paid CEOs that year were Mike Lazaridis of Research In Motion, who earned $51.5 million in total compensation, and Royal Bank’s Gordon Nixon, at $44.2 million. Magna’s co-CEOs Siegfried Wolf and Donald Walker earned $13.4 million and $12 million, respectively.)

And it’s not just Stronach’s hefty pay that rankles investors. It’s his tendency to use his clout as controlling shareholder, made possible by the family’s ownership of a special class of multiple voting shares, to periodically grab Magna’s steering wheel as he pursued a host of risky business ideas. They included building a racetrack and casino empire, trying to buy Chrysler, the most troubled of the beleaguered Detroit Three, and selling part of Magna to a Russian tycoon with a murky background. As a result, the company’s stock trades at a significant discount to its rivals—a phenomenon known on the Street as the “Frank Factor.”

So there was a palpable sigh of shareholder relief when Magna said in May that Stronach had finally accepted a management proposal to buy out his voting control. The jubilation initially overshadowed the deal’s jaw-dropping $863-million price tag, which represents a nearly 1,800 per cent premium for Stronach’s voting shares. But even as Magna’s regular shares began to climb, a feeling of bitterness set in among several big institutional shareholders. After all, it was one thing to look past the consulting fees as long as the company was growing and making money, but quite another to allow Stronach a final egregious handout simply for agreeing to relinquish his iron grip.

Faced with mounting complaints, the Ontario Securities Commission decided to hold a hearing on the issue this week. Much of what the regulator is looking at are the technical details of the transaction, including whether the board provided sufficient information to investors before a vote on the deal, scheduled for June 28. Critics are worried that if the transaction is approved without serious changes—a likely scenario judging by the 15 per cent rise in Magna’s stock price on the day the deal was announced—it could send the wrong message to the country’s capital markets, namely that bad behaviour is rewarded. “There’s an enormous premium being paid here,” says Joseph Groia of Groia & Co., a former head of enforcement for the OSC who is now acting on behalf of shareholders’ rights group FAIR Canada in the Magna case. “And in a marketplace with a large number of two-tier share structures, that would set a terrible precedent.”

Of course, it’s not like Magna shareholders didn’t know what they were getting into. Magna and Stronach have a long history of what Richard Powers, the associate dean at the University of Toronto’s Rotman School of Management, called “non-best practices” when it comes to corporate governance. Nevertheless, Powers points the finger at Magna’s board for being too timid to offer a recommendation on how shareholders should vote. “That’s why they get paid,” he says. “The only inference you can take from that is they had questions they weren’t willing to raise in front of Frank.”

For its part, Magna has said it is doing its best to satisfy the OSC’s concerns about disclosure, raising the possibility of some sort of compromise. Last week, Magna released two internal reports about the transaction, one of which warned that the proposed deal would be “controversial.” As for why the arrangement was struck in the first place, Stronach, 77, who declined an interview request, has offered only vague references about it being time to let go of the company he started in the late 1950s. He has also said he hopes there will still be a role at Magna for his daughter Belinda Stronach, who served as CEO of the company before entering federal politics (she is currently Magna’s vice-chairman).

It’s a major about-face for a man who has long argued that family-controlled companies are desirable because they’re not as beholden to short-term goals like meeting analysts’ quarterly profit targets, and can instead focus on long-term strategies. Critics, however, say such ownership structures aren’t fair to the company’s real owners—the shareholders—and create opportunities for abuse.

Few investors are thrilled with the idea of paying a massive sum just to see Stronach go away, but not everyone agrees that the regulator should have become involved. If the OSC decides to kill the deal, it could mean the era of Stronach rule at Magna will continue indefinitely, since no one can force him to sell his shares. “I think Frank Stronach is extracting a pound of flesh,” says David Taylor, a portfolio manager at Goodman & Co., which own $5 million worth of Magna stock. “But the beauty of this deal is you get to vote on it. I can’t think of anything fairer than that.” Taylor also dismisses the idea that Magna’s board could have handled things better. “We can all do the math,” he says. “We know the price they are paying per share and it’s a ridiculous number. So the board can do all the analysis and calculations it wants, but it wouldn’t change anybody’s view whatsoever. We know it’s a stupid price.” At the end of the day, he says, the elimination of the dual-class structure should boost the stock from its current price of about $69 to around $100, based on the valuation of Magna’s rivals. “So we’re paying $800 million and change to add $3 billion in value—there’s your analysis.”

Other investors, however, say it’s time to take a stand. The Ontario Teachers’ Pension Plan was previously a big Magna shareholder, but sold off all but one share (to remain involved with Magna as it fights dual-class share structures as a matter of principle) several years ago following Stronach’s decision to sell a big piece of the company to Russian billionaire Oleg Deripaska, an industrialist with close ties to Russian Prime Minister Vladimir Putin. (Deripaska sold his shares a year later amid the global economic collapse.) “We had repeatedly spoken to them about the compensation they provide to Mr. Stronach in terms of these consulting arrangements because we didn’t think there was any justification for that,” says Wayne Kozun, the senior vice-president of public equities for Teachers’ investment arm. “We’ve had an issue with that because he’s not actively involved with running the company but he’s getting a life-long annuity of tens of millions a year. And we didn’t like the dual-class shares and the lack of independence of directors either.”

Like other critics, Teachers’ is concerned the deal to buy out Stronach will set a bad precedent, but Kozun says there’s other dangers lurking under the hood. Under the current arrangement, Stronach will get control over Magna’s new electric car division (and another four years of consulting payments) even though he would have a minority financial interest in the undertaking. At present, the project is considered to be peripheral to Magna’s core auto parts business, but if that changes, Kozun says Stronach could once again end up in the driver’s seat. “What they could be setting up here is a new dual-class Magna similar to the way it has existed in the past,” Kozun says. “And then if we wanted to buy out Mr. Stronach, we would have to pay another 1,800 per cent premium.” All of a sudden, $41 million a year is starting to look like bargain.

Newsmakers '09: Road warrior

By Chris Sorens - Tuesday, December 8, 2009 at 6:40 PM - 2 Comments

To the relief of just about everyone around him, auto parts czar Frank Stronach appears prepared to finally forgo his dream of becoming a full-fledged manufacturer of cars and trucks.

The wily Austrian-born businessman’s latest effort to get into the higher-profile vehicle-manufacturing game careened off the road in November when General Motors, no longer at death’s door, decided to hang on to its European Opel division instead of selling a majority stake to Stronach’s Magna International and a Russian partner.

Stronach’s disappointment at the unexpected turn of events was etched on his craggy face, but the official line from the company was one of understanding (GM is Magna’s biggest customer) and a pledge to get back to basics. Suffice to say, Magna’s investors couldn’t have been happier. Shares of the Aurora, Ont.-based company soared 25 per cent by the end of the week of the announcement. Analysts, too, seemed thrilled the deal fell apart. For one thing, building cars and trucks has just as often been a road to ruin as it has to riches. Just ask Ford, GM and Chrysler, the latter of which Stronach also tried unsuccessfully to buy before the wheels fell off the entire North American industry.

The Opel deal also threatened to take Magna’s eye off the ball just as opportunities to acquire troubled auto parts companies are mounting. And then there was the not insignificant issue of alienating Magna’s current car-making customers, several of whom didn’t fancy the idea of buying their vehicle parts from a direct competitor.

But while sticking to auto parts might be the most sensible (and profitable) course of action, Stronach has rarely paid much attention, if any, to what other people think of his ideas. Take his troubled foray into the horse-racing business, for example. A fan of thoroughbred horses and racing, Stronach spent huge sums of money through Magna Entertainment to scoop up racetracks across the continent in the hopes of creating an entertainment colossus, often to the chagrin of Magna International shareholders. Creaking with debt, the now spun-off company is attempting to restructure under bankruptcy protection, although Stronach has apparently not given up on the concept.

Stronach has also been criticized for taking hefty pay packages, considering he is the company’s chairman, not its CEO. Although his compensation plummeted to a paltry (by Stronach’s standards) $10.7 million excluding stock options last year, as part of a temporary effort to reflect the industry downturn, he had previously pulled in closer to $40 million or $50 million—a level that is bound to return once the industry is again firing on all cylinders.

Why should we believe his car-building fantasies will be put down more easily?

Magna edges closer to making cars

By Colin Campbell - Wednesday, January 28, 2009 at 8:00 AM - 0 Comments

Could Magna International grow from making just car parts into a full-fledged carmaker? It’s not all that far-fetched, say some industry pundits.

Last week, the Aurora, Ont.-based company hired former Chrysler executive Wolfgang Bernhard as a consultant, prompting a wave of rumours that the company was in talks to buy pieces of the struggling auto company. Magna, after all, had talks with Chrysler just last year about teaming up to build cars, and Bernhard had worked with Cerberus Capital Management when it took control of Chrysler in 2007. Both Magna and Chrysler immediately denied the reports. But that hasn’t dampened speculation that the company is looking to do more than make parts.

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