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Magna changes tune on debt, eyes acquisitions

Don Walker, chief executive of Magna International Inc., talks to employees during a meeting at the Magna plant in Brampton, Ont., on Wednesday, Nov. 16, 2011.

Fernando Morales/The Globe and Mail/Fernando Morales/The Globe and Mail

A year after Frank Stronach sold control of the company he founded, a new Magna International Inc. is gradually emerging.

Don Walker, who took over from Mr. Stronach as Magna's sole chief executive officer in November, 2010, said Thursday that the company is prepared to take on debt to finance acquisitions and will exit businesses that aren't part of its expansion plans.

"I think we can afford to be more aggressive in doing strategic acquisitions that are going to create value," Mr. Walker said in an interview after a half-day presentation to shareholders and analysts. "We would be prepared to use the cash and borrow some money if it made sense."

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The willingness to take on debt is a significant departure for Magna. Over the past two decades, the company, on Mr. Stronach's insistence, built up and maintained a massive cash pile – a reserve that at times stood at more than $1.5-billion (U.S.). But the strategy of growing slowly and maintaining a healthy balance sheet – largely a response to Magna's near-bankruptcy experience in 1990 – also allowed Magna to become one of the world's largest auto parts makers and helped it to weather the 2008-2009 economic crisis.

Mr. Walker said Thursday that he believes the company missed out on some good acquisition targets during the economic crisis: "There were some opportunities for very strategic buys that were core to us and had good technology and where we could have got good valuation."

But the board of directors was more concerned about the entire industry melting down, he added, which would have caused Magna to burn through most of its cash.

Since the crisis, Mr. Walker noted, prices for acquisition targets have risen, but are still at reasonable levels, unlike the middle of the last decade when financial players were entering the auto parts business, overpaying for what they bought and then undercutting on prices to win business from auto makers.

While he sifts through those proposals, Mr. Walker and Magna are also engaged in a profound transformation in the auto industry as car makers go global and slash the number of platforms or vehicle underbodies.

As Magna's chief marketing officer informed those at the meeting Thursday, Hyundai Motor Co. of South Korea, as one example, is reducing its platforms to six globally from the current 33. While that can be good for Magna – in part because its Cosma metal forming division is Hyundai's largest supplier in Russia – it also means that Hyundai and other auto makers expect their parts makers to join them when they jump into new markets.

"So if they're going to give us an order, they expect us to be able to support them in all of the regions," Mr. Walker said. "If we're not there, then we don't get the order, which means we don't get the order for our core markets of North America and Europe either."

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That is why Magna got out of automotive carpet making: It was a regional player and carpet wasn't a core business. It would have taken a significant amount of money to make it a global business. "We're not naive enough to believe that we can be the best in the world at everything," Mr. Walker said.

The company prefers not to sell businesses, he added, but if Magna is not going to be successful then it's not good for shareholders, customers or employees to simply hang on.

Assessing which businesses to stay in and which ones to exit is an ongoing process, he said, but the company will fine-tune its product strategy during the next year or two to help make those decisions.

Magna announced Thursday that it had recently purchased a German aluminum casting company, as part of its strategy to acquire businesses that add to its technological capabilities and customer base.

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About the Author
Auto and Steel Industry Reporter

Greg Keenan has covered the automotive and steel industries for The Globe and Mail since 1995. He also writes about broader manufacturing trends. He is a graduate of the University of Toronto and of the University of Western Ontario School of Journalism. More

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