The Dating Game: Magna Likes Chrysler

Includes: DDAIF, MGA
by: George Gutowski

Magna International (NYSE:MGA) is looking at purchasing Chrysler from DaimlerChrysler (DCX). Of all the tire kickers, this one perhaps makes the most sense from an operations point of view. Private equity types have no real and direct experience at operating plants, logistics, unionized work forces and delivering parts just in time. They probably cannot set the timer on an automatic coffee maker.

Magna currently derives approximately 25% of revenues from Chrysler. They will be able to intuit much of Chrysler much better than external financial types.

Magna is led by Mr. Frank Stronach, an immigrant success story of whom a movie should be made. Currently at the age of 74, he is approaching the Warren Buffet question of who will succeed. A robust management team of some 50 year olds populates the executive suite. An exceptionally talented daughter is a full time politician and has held senior level cabinet positions.

Magna has hit many home runs, but has some famous strike-outs. It did go bankrupt in the early 90’s because it became involved in many non-car part activities. There has always been the issue of horse racing and race tracks which now has been tucked away in a separate company. There is a tendency to get distracted. But I digress!

If Magna takes over Chrysler, the other manufacturers will view Magna through an exceptionally hostile lens. 75% of revenues will be subject to hyper scrutiny. If Magna bids substantially less than private equity than the market will conclude that private equity is overpaying. Quite the stand off.

From Magna’s point of view, I am sure they are giving thanks that Ford (NYSE:F) and the General Motors (NYSE:GM) are in weakened conditions and not at their old fighting weights where their word was law. In the old days they would not have dared.

The correct move will be for private equity to connect with Magna to ensure the purchase valuation is correct. Also they will need the operations management perspective to actually do something with Chrysler. Watch for this dating game to develop.

MGA vs. DCX 1-yr chart