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A Takeover Road Less Traveled


Canadian auto parts maker Magna International Inc. (MGA) may have a low profile, but its ambitions have always been lofty. Last fall the company invited journalists to its U.S. headquarters north of Detroit to see a single-seat orange sports car designed, engineered, and built from the ground up by Magna. August Hofbauer, North American president of the Magna Steyr division that assembles completed cars for several major carmakers, beamed proudly as he said: "We developed this vehicle from concept to production." He went on to say that "we can take over everything from the carmakers."

Maybe even a whole company. The $24 billion Magna has emerged as a legitimate candidate to buy Chrysler Group (DCX), possibly in combination with a private equity firm. On the surface, buying Chrysler would seem a madcap venture for Magna Chairman Frank Stronach. The deal would instantly put him in competition with many of his biggest parts-buying clients, potentially driving some of them away. Moreover, Magna's latest balance sheet shows a surplus of only $1.9 billion. Depending on how a deal is structured, Magna may have to go into debt to buy the company or fix its multitude of problems.

But Stronach, 74, an Austrian-born Canadian who declined to speak to BusinessWeek, is nothing if not an unconventional thinker. He has pushed Magna from parts making to carmaking, plunged headlong into such ventures as thoroughbred racing, and once put his daughter at the company's helm when she was just 34. "Frank is a fountain of provocative ideas," says longtime industry watcher John A. Casesa, a partner in the consulting firm Casesa Shapiro Group. "Some of them are crazy. There is a constant tension between him and the team to control him."

Stronach recently told Canadian Auto Workers President Buzz Hargrove that he is not worried about the prospect of alienating customers if he takes over Chrysler. "I brought it up with Frank," Hargrove recalls, "and his position was that they have the best quality, technology, and delivery, so people will still want to buy from them."

There is no doubt that Stronach's team has some of the key skills necessary to run Chrysler. Its factory in Graz, Austria, builds 260,000 cars a year, assembling eight models on seven platforms for four different carmakers. Its 42 defects per 100 vehicles make it the top-quality assembly plant in Europe, says J.D. Power & Associates (MHP). The custom manufacturing part of the business grew 8% last year, to $4.4 billion, thanks to a 19% jump in the fourth quarter, and its profitability helped mitigate a shortfall in Magna's core automotive parts business. Overall, Magna's 2006 profits fell 17%, to $528 million, as higher raw materials costs and lower prices from the automakers made life tough for most parts makers.

One of the reasons Magna hasn't suffered the fate of the many bankrupt companies in the parts business is that Stronach is a savvy strategist. While many parts makers have taken low-margin contracts with the Big Three just to boost sales, Magna has passed on risky parts deals with Detroit.

A JOINT BID?

Stronach is good at managing his fortunes. But reversing Chrysler's would be quite another matter. Even if Stronach could come up with the money to buy Chrysler (one source bidding on the carmaker says parent DaimlerChrysler (DCX) wants $6 billion to $8 billion), he may need even more cash to fix future problems. Plus, Magna has never dealt with car dealers or had to try to tap into the psyche of American consumers to try to figure out what the next hit vehicle will be. Says KeyBanc Capital Markets analyst Brett D. Hoselton: "I doubt Magna is really excited about getting into the marketing and distribution side of the business."

More likely, Magna could end up as one partner in a consortium buying Chrysler. Several sources close to Daimler's sale efforts have said that Magna could form a joint bid with a private equity player. One Magna executive says Cerberus Capital Management--the New York firm that bought 51% of GM's GMAC finance arm and is a Chrysler bidder--could be one such partner. A partner like Cerberus could raise money and take a majority stake. Magna could run the plants and build the cars, which it already does on a smaller scale.

For Stronach, who started building his empire in the Fifties, running a company the size of Chrysler "would be a natural progression," says KeyBanc's Hoselton.

By David Welch and Gail Edmondson


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