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Magna Cum Laude?

Leo Kolivakis's picture




 

Via Pension Pulse.

CBC News reports, Magna, Stronach deal to go ahead:

Magna
International said Tuesday it will move ahead with a deal worth nearly
$1 billion to have founder Frank Stronach give up control over the
auto parts giant.

 

Dissident shareholders opposed to the plan have
notified the Aurora, Ont.-based company that they do not intend
further legal appeals, Magna said in a release.

 

A day earlier, the Ontario Divisional Court upheld a lower-court ruling approving the proposal.

 

The
dissident shareholders included the Canada Pension Plan Investment
Board, Ontario Teachers' Pension Plan, OMERS, the Alberta Investment
Management Corp. and British Columbia Investment Management Corp.

 

They
had opposed the size of the premium over the present value of the
company's shares — about 18-fold — to be paid to the Stronach family
trust, and argued it would set a dangerous precedent for similar,
future deals in terms of the loss of shareholder value.

 

The deal
provides for Stronach to receive $300 million US in cash, $120 million
in consulting fees over the next four years, nine million single-vote
shares of Magna and control over a new joint venture focused on
electric vehicles.

 

Shares Rise

 

Magna shares closed up $3.43, or 4.3 per cent, to $83.04 Tuesday on the Toronto Stock Exchange.

 

Magna said it planned to implement the change after the close of markets Tuesday.

 

"We
are very pleased with the court's decision and that we are finally in a
position to close the arrangement, which has received strong support
from Magna's shareholders," Magna CFO Vince Galifi said.

 

"With
the transaction completed, we can refocus on pursuing our long-term
growth strategy, including further investments in both innovation and
emerging markets, in order to continue to serve our customers around
the world."

If you read the comments on this article posted on the CBC website, they range from "what a crook!" to "he deserves his payday". Let me go over a couple of comments below. The first one blasts institutional shareholders:

The
institutional shareholders obviously don't like the plan that was
approved by 75% of shareholders. This makes them minority shareholders,
and they have a tried-and-true recourse - sell their shares and move
their money elsewhere. They simply seem bitter that the "big guns" of
the giant pension plan don't control what happens to this company. As
long as Frank Stronach remains in control, they never will be. The
irony is that after Stronach is gone, CPP, Omers, Teachers and the rest
can work on buying a majority of shares. If they do that, you can bet
the farm they will not be worried about what minority shareholders
think...

Personally, we need more companies run by individuals.
Investment corporations don't care what they invest in - they only care
about the money. They sell RIM in droves because record profits
weren't high enough, they sell Tim Horton's because the gain from one
year to the next was not big enough. We need Carnegies and Fords and
Gateses, who care about the company they started and don't run for
greener pastures at the drop of a hat.

I take issue with this statement because pension funds are by far more
long-term in their investment approach than mutual funds or hedge funds.
If anything, you'd want to have more pension funds as shareholders to
take decisions that are in the best interest of long-term shareholders.

True, it's
individuals who start companies and grow them, but once they pass a
certain critical mass, these companies become behemoths and there is
nothing that suggests to me that pension funds do not act in the best
interest of all shareholders. In fact, it's quite the opposite.

To highlight this point, the second comment that struck me on CBC's website took issue with Canada's dual voting shares:

"75%
of shareholders voted in favour of the deal". Does that include
Frank's votes which are worth 51% of all shareholder votes? Democracy
in action...

By far the simplest solution would have been for
the Canadian securities regulators to outlaw dual voting shares, as is
the case in most other civilized financial constituencies. Why does
Canada permit this abusive malpractice?

Opposition to
dual-class shares has been growing in recent years. In August 2005, Tara
Gry of the Canadian Library of Parliament wrote an excellent comment on
dual-class shares and best practices in corporate governance.

More recently, the Ontario Teachers' Pension Plan posted a highly critical analysis of the Magna-style dual share collapses, asking whether class B shares are worth $863 million (click on images to enlarge):

Magna’s
Class B shares have not traded publicly since 2007. One proxy for
their value could be the price the company paid in 2007 to repurchase
all Class B shares from holders other than Mr. Stronach in a complex
deal involving Russian billionaire Oleg Deripaska.

 

In that
transaction, the Class B shares were valued at $114 each, representing a
30% premium over the trading value of the Class A shares at the time.
(Teachers’ was a vocal critic of the 2007 transaction as one that was
too rich and unfair to the Class A shareholders.) A 30% premium over
the pre-announcement trading price of the Class A shares on May 6,
2010, (approximately $64) would be roughly $83 per Class B share, or
$63 million in total, far below the proposed payment of US$863 million.

 

A
better proxy may be the historical relative market prices of the Magna
Class A and B shares from 2001 until 2007 (when the Class B shares
ceased trading publicly). It is interesting to note that the average
price premium from 2001 to 2007 of the Class Bs over the Class As was
just 4.2%. This can be taken as a clear signal from the market that the
value of the Class B shares during that period was effectively the same
as the Class A shares. We ask ourselves, what has changed since 2007
to justify such a massive premium?

 

With
these comparisons in mind, it is difficult to understand the basis for
the US$863 million payment Magna proposes for Mr. Stronach.
We
found nothing in the management information circular in the way of a
detailed rationale for the proposed payment. We consider this to be
especially important given the current value of Magna’s Class A shares
(which the Class B shares used to track closely) and the precedent
transactions where no premium was paid to holders of multiple voting
shares when dual class share structures were eliminated.

In the end, despite opposition from several large Canadian public pension funds, Frank Stronach's $1-billion payday arrived:

In
all, the payout is valued at roughly $1-billion – an unprecedented
1,800% premium and dilution compared to other conversion deals.

 

The
Canada Pension Plan Investment Board, and other shareholders, like the
Ontario Teachers Pension Plan, have fought the plan of arrangement
before an Ontario Securities Commission hearing in June, as well as
before Ontario Superior Court of Justice earlier this month, and the
Divisional Court last week.

 

They argued the payout to Mr. Stronach was “abusive” and would set a dangerous precedent for other conversion deals.

 

Ultimately,
however, the three-judge Divisional Court panel ruled late Monday that
it was satisfied that the plan of arrangement met the court’s “fair
and balanced” test, and should be allowed to proceed. They agreed with
the lower court that a shareholder vote, in which 75% of Magna’s common
shareholders approved the plan, should be given significant weight.

 

Linda
Sims, CPPIB spokeswoman, said the country’s largest pension plan was
“disappointed” by the outcome, but would not appeal the decision.

 

“As
an ongoing shareholder of Magna, we intend to engage with the company
on its governance structure and practices under the revised ownership
arrangement,” she said in an email.

Was the payout to Frank Stronach "abusive"? Any reasonable analysis
would suggest so, but this battle was lost. While recognizing and
appreciating that entrepreneurs like Mr. Stronach are the backbone of
our economy, founding companies that create lots of jobs while taking
on enormous personal financial risks (see video below), I also share the concerns of institutional investors who feel this decision will set a dangerous precedent for other conversion deals.

 

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Wed, 09/01/2010 - 07:46 | 557182 grant
grant's picture

If pension funds wish to exercise control over their investments, why are they buying non-controlling shares?

I dunno why the owners voted for such a big payday but obviously they felt it was a fair deal.

Wed, 09/01/2010 - 12:49 | 557855 Nihilarian
Nihilarian's picture

Two Words: Fiduciary Responsibility. The LAST thing company execs want to do is to be responsible for the performance (or lack thereof) of the pension fund. Which would put their employment into jeopardy after they screw the pensioners and stock holders. The idea is to transfer as much of the decision to a third party, the pension managers, and then blame them if anything goes wrong.

Wed, 09/01/2010 - 07:31 | 557165 TobyJones
TobyJones's picture

If only things were as simple as people getting what they deserved.  It is quite a premium but I think "being reasonable" left the station some time ago.

Tue, 08/31/2010 - 23:58 | 556904 Nihilarian
Nihilarian's picture

I take issue with this statement because pension funds are by far more long-term in their investment approach than mutual funds or hedge funds.

Yeah, until they are heavily under funded. What's the going assumption for annualized return for the pension industry, 8%? That's some strong hashish they're smoking. Liabilities will have to come out of the E in the P/E. Something tells me pension's long term outlook has just gotten fast forwarded to the present, holmes.

Wed, 09/01/2010 - 08:21 | 557223 OldTrooper
OldTrooper's picture

My thoughts exactly.  Why do I suspect that the pension funds wouldn't hesitate to throw the other investors under a bus for a 1800% premium?

Tue, 08/31/2010 - 23:46 | 556893 GoldmanSux
GoldmanSux's picture

Kleptocrat is a good word. Glad to see him go. His compliant board has gifted him $20million+ every year for over a decade. Pathetic.

Wed, 09/01/2010 - 00:23 | 556947 knukles
knukles's picture

Jeeezzzzzzzzzz.
Wha'd I do missing this guy?  Is he unattached? 

Tue, 08/31/2010 - 21:20 | 556682 Boilermaker
Boilermaker's picture

Actually, Leo, having worked in the auto industry for 15 years and working in it now in the belly of the beast (Detroit)...I can say that Magna is a really solid player in the industry...Canucks and all.

Tue, 08/31/2010 - 22:11 | 556737 Leo Kolivakis
Leo Kolivakis's picture

Magna is a great company and Stronach is a great entrepreneur, but did he derserve this payout? Think about it this way, what's the multiple between total comp. of factory workers and their CEO in the US as compared to Japan and even Europe? More bluntly, how much is enough?

Wed, 09/01/2010 - 08:16 | 557218 OldTrooper
OldTrooper's picture

did he derserve this payout?

Apparently he did - someone was willing to pay that much for control of the company.  This is a business deal.  The structure of the company has been, I assume, well known to shareholders for years.  Now they whine about it?  Grow up.

More bluntly, how much is enough?

I'd say that in this case a billion was enough...to get the deal done.

Shareholders have recourse when a company is not structured to their liking, the board approves what they consider excessive compensation or there are other issues:  Sell the damn stock!  You have no one to blame but yourself if you buy or hold shares, knowing there are problems but ignoring them because it's 'still a good investment'.

Wed, 09/01/2010 - 07:15 | 557154 Boilermaker
Boilermaker's picture

No, he didn't deserve it.  Rick W. didn't deserve a golden parachute at GM either nor Nardelli at Chrsyler (or Cerebus, take your pick).  The auto executives are just as slimy as the banksters.  Too much money on the table...they all just fill their pockets as fast as they can.  Furthermore, in the auto industry, it's normally the middle managers who get harpooned well before the workers.

I wouldn't (and don't) own shares in any suppliers or OEMs.  They are much like airlines.  They can hit streaks of profit but, eventually, the topple due to greed at the top and bottom of the food chain.

Tue, 08/31/2010 - 23:22 | 556860 LePetomane
LePetomane's picture

LOL Like OTPP was going to pass the difference down to factory workers.

Tue, 08/31/2010 - 23:31 | 556871 Leo Kolivakis
Leo Kolivakis's picture

No, but it was going to pass it to shareholders.

Tue, 08/31/2010 - 22:31 | 556781 taraxias
taraxias's picture

Stronach is a self-serving kleptocrat. How much did his ill conceived Horse Racing and Real Estate/Entertainment adventures (failures to be more accurate) cost the Magna shareholders?

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