It's the dream that causes us to admire him so much. In a nation of immigrants, the Frank Stronach saga - the guy who came to Canada with a few bucks in his pocket and made good - resonates.
How many times have we heard about those humble beginnings? The story has been told and retold: Mr. Stronach, after surviving the Depression and war in his early years, arrived in Canada in the mid-1950s, opened up a business in a garage and, through drive and luck and brain, turned it into a $20-billion goliath. Perhaps that's one reason - because it is so compelling - that he gets so much latitude to do as he pleases. (Well, that, and a medieval attitude toward minority shareholders.)
Having lived the newcomer's dream, Mr. Stronach is now in a position where he is pursuing his goals almost entirely with other people's money. That fact shouldn't be lost in the rush to throw laurels at the Magna International founder's feet for landing the deal to buy Opel, General Motors' European auto maker. Mr. Stronach isn't taking on a big risk, but a massive one, in realizing his long-held ambition to complete Magna's transition from mere bumper-banger to auto maker. It may go swimmingly, but if it doesn't, who loses?
Rarely in corporate history has an auction lasted so long and generated so much press for a business in such rotten shape. Opel was one of the things that bled GM until it was a corpse. Since 2000, GM has lost more than $6-billion (U.S.) in Europe, where Opel is by far its dominant brand. In its best year of the decade, it made $188-million: That is to say, for every dollar in sales, it earned a little more than half a penny. That's what constitutes a banner year at Opel. This isn't some recession hard-luck case. Opel was busted long before Lehman Brothers went down.
But never mind. Just because the same blockheads who drove GM into the bankruptcy repair shop couldn't make it work doesn't mean that Magna can't. Nor does it matter that Magna and its partner-for-now, Russia's Sberbank, haven't got a clue how to market cars. The GM gang had marketing know-how up the wazoo and look at all the good it did them.
What's important is not the nature of Magna's experience but the nature of the car assembly business itself. Quick: Name the best-run automotive companies in the world. Which ones spring to mind? Toyota would have to be near the top of the list. Suppose an investor had been prescient enough to buy an equity stake in the Japanese auto maker in 1988. And suppose she'd hung on all through Toyota's glorious rise to No. 1 among global automotive companies, and then was wise enough to sell last summer, before the stock market crash. How much would she have made? A small fortune, right?
The answer is a little more than 5 per cent a year.
That's not the whole story of the sector, of course. Honda has done slightly better, in investment terms - Volkswagen, better still. But disasters are numerous and they go beyond the wreckage of GM and Chrysler. Ford, despite its renaissance, has made nothing for its owners for 20 years. Daimler has been a value-destruction machine. Nice cars, though.
Why is it so tough to make a buck in cars? Lots of reasons, but we'll focus on one. Finance 101 tells you that over the long run, a business is economic only if its return on capital exceeds the cost of that capital. In layman's terms: It makes no sense to borrow money at 8 per cent to invest in a business that earns a 6-per-cent return on the cash. Why bother?
And this one important measure - call it the return-on-capital test - is one that even great auto makers often fail. Volkswagen has had but one year since 1995 in which it made more than 6 per cent on its capital. The capital requirements of designing and building cars - including the need to carry billions or even tens of billions in cash at all times - are too huge, the consumer too fickle, the unions too muscular, the competition too fierce, the downturns too sudden. All the farfegnug en in the world doesn't help.
The auto parts business isn't a lot better. But Magna has prospered in that field by taking an uber-cautious approach to capital. After a brush with bankruptcy two decades ago, Mr. Stronach decided he'd never load up on debt again. And so when the automotive market hit a rough spot - as it always does, eventually - it was Magna's competitors that wound up in Chapter 11 or in liquidation. It became as large as it is by picking them off.
Magna could be doing that again as bankruptcies in the parts sector pile up. But now the company will be distracted by the turnaround at Opel (which sucks up $1.5-billion to $2-billion in capital a year, according to Credit Suisse). Mr. Stronach, though, holds only a tiny slice of Magna's equity, so he needn't fear for his pocketbook if Opel turns into a sinkhole. Dreams are better when they're financed by strangers.