Magna International Corporation Case Study

Magna International Corporation Case Study

Introduction:

Magna International Corporation manufactures automotive systems in order to sell to original equipment manufacturers of cars in three different regions - North America, Europe, and Rest of World (mainly Asia, South America and Africa). Magna established in 1969; the founder is Frank Stronach. He was born in Weiz, Austria, and immigrated to Canada in 1954. Magna provides many brands throughout the world with automative components. The securities of Magna are common stocks which listed on both the Toronto Stock Exchange ("TSX") and The New York Stock Exchange ("NYSE"). Magna had two classes of shares – about 112 million publicly traded class A shares, carries one vote, and 726,829 class B shares, with 300 votes each. The class B shares were exclusively owned by the Stronach Family Trust. Frank Stronach controlled 66% of the voting interest, while owning around 1% of the equity.

Magna transaction:

On May 5, 2010 Magna announced that it will repurchase all of the Stronach Family Trust Class B shares. Magna offered around $863 Million to Mr. Stronach to buy back his 726,829 multiple-voting shares to get the control of the company. The $863 Million contains of cash which is worth US $300 Million, 9 Million Class A common shares issued by Magna, and a four-year renewal of his generous consulting arrangement with Magna, worth an estimated US $120 million. Moreover, Magna also will give his founder Mr. Stronach 27% interest E-Car joint venture of Magna. Pulsing the extra part gaining from the E-Cars joint venture, the cash and the Class A common shares, Mr. Stronach will receive around US $1 billion after he sells Class B controlling shares as well as the control power of Magna company. As a result of the deal, Stronach's family trust will lose the control the board. The shareholders will vote to elect the new broad The Stronach Family Trust would continue to own minority equity in the company via Class A shares "common shares".

Based on the post-announcement closing price of Magna, Magna's Class B shares had a value of about US $45 million in the market. It has been extensively reported in the media that Stronach received a multiple of 18 times the value of the Class A shares for his Class B shares (Jeffrey G. MacIntosh, 2011). pooling all benefits Stronach received; the multiple is actually more on the order of 22 (Jeffrey G. MacIntosh, 2011). Institutional investors believe that this deal is "offensive" and "horrible" since Magna is paying out a huge premium.

Question 1: Sets out the context for these issues as companies in Canada remove the existence of dual voting shares.

Historically, in Canada dual voting shares are a way to raising equity in the international market while remaining the control of the firm in domestic market. Back to 1970s, when media and telecommunications companies established by the Radio-television and Telecommunications Commission, due to the limited supply of broadcasting licenses, most Canadian were restricted to foreign ownership. Therefore, dual class structure was created in order to raise capital in outside market without losing Canadian control of the firms. In dual-voting structure, there are two classes of shares issued by a company. A classification of common stock indicates that each class has different voting right, and dividend payments. Furthermore, There are two classes, class A and class B, which is either voting shares or nonvoting shares. The voting class, participates in the decision making process of a company, while the non-voting right class, helps the company to raise capital with no control loss.

First, dual class share structure helps a company to maintain control. Tara Gry (2005) stated that the voting shares holders have more power to enhance the poor management and avoid the consequences from bad decisions. He also mentioned that dual shares allow their holders to keep the control of the company. It creates the separation between those who invest the money and take the risk and those who do not have much equity of the company but have the controlling votes.

Second, dual class shares protect a company from any unwanted take-over bids to occur because the founders has kept the voting shares, and would not allow a take-over bid to occur. Tara Gry (2005) reported that the stability of board and management let the firm keep an eye in long-term success instead of investors' short-term profitability purpose.

Tara Gry (2005) metioned that "Company founders reluctant to use debt financing because dual class structure is a way to grow the company without losing control". Moreover, Founders are more likely to manage and benefit shareholders with their skills and expertise and then get the future benefit from