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Media Co-op Investor: February

We Look at the Parts Which Make Up Magna

by Gwalgen Geordie Dent

Media Co-op Investor: February

Welcome to Media Co-op Investor!

The Media Co-op Investor Series aims to help the general public understand the stock market, how it works, and the major companies which benefit from it.

Every two weeks we examine an element or term in the stock market, how the Toronto Media Co-op has done fake-investing in companies on the Toronto Stock Exchange as well as highlighting specific large Canadian Companies, why their price has gone up and down and what they are all about.

To learn more go here.

This Week's Term:  Mergers

While everyone knows at a base level what a merger is (two companies combining), why they happen is often not as well explored.  

It's not simply 'synergy' or a company wanting to own everything that they can (though this happens).  Often there are a variety of reasons why mergers could be beneficial for a company.

First of all,  two companies that make the same product will often both have management and/or oversight operations in place, one of which can usually be axed during a merger to save money and increase profit.  Also, having the ability to produce more products and therefore sell more things to an individual customer can also boost sales.  These principles are commonly called economies of scale and economies of scope respectively.   

Another reason for mergers is price fixing.  When you take over a competitor, you generally get to screw customers for more than you were able to before by setting prices higher.

Taxation is another popular motivation for mergers in the US, so much so that limits had to be imposed upon it.    A company can buy another which is losing money and use the loss as a tax reduction to reduce the amount of taxes they owe.  

Of course, mergers and stock markets are hot topics at the moment mainly due to the proposed merger of the Toronto Stock Exchange (TSX) and the London Stock Exchange (LSGE).  

Why are they trying to merge?  First of all, remember that a stock market's main goal is to allow companies to raise money.  The TSX as a company itself, makes money by charging fees for every transaction that passes through the TSX making it worth close to $3 billion.  But although the TSX has done a very good job buying up older exchanges in Montreal and Vancouver, other exchange mediums have popped up in Canada recently.  

Omega, MATCH Now and the bank-backed Alpha Group have been used for 1/3rd of all Canadian stock transactions, cutting into need for the TSX.

While stock exchanges used to be non-profit places where companies could raise money, raising money has now become a business itself.  TSX and the London Exchange are merging because of this now.  The benefits to the companies are twofold.  First, they become a more attractive place for business to raise money.  All of a sudden, a company which raises money on the TSX is more easily able to get listed and raise money on the LSGE.

Second, the new company will be the even more of a major hub for mining stocks.  80% of all mining stocks are currently on the TSX,  and about one third of the London exchange are mining stocks.

Add that to the fact that the LSGE will now have access to a major derivatives markets thank to Montreal's TMX market and one can see why stockholders would want the two exchanges to merge.

However, the merger is likely not going to happen.  Political pressure from the Saskatchewan government scuttled the sale of Potash corp to Australia's BHP Bilton Ltd last year.  The same is likely to happen for this merger. 

Constitutional authority over stock markets belong to the provinces who have their own securities commissions. The Provinces have been fighting against the federally-motivated creation of a national securities regulator since the financial crisis.  Imagine the political blowout if the authority to regulate stock markets and companies was pulled out of Canada altogether and headquartered in London.

What we invested in this week

This week we tracked our largest Canadian consumers stocks.  We theoretically-bought about $1000 worth of each company on September 15th.

How we did this week

Our consumer stocks have done the worst out of all our portfolios so far but we've still turned a 5.2% profit.

Most of the consumer companies doing poorly are supermarkets (Loblaws, Metro, etc.), while companies such as Canadian Tire and Timmies are doing great.  

Looking at the bigger picture, this makes sense to a degree.  The world is acting like the recession has passed and it's back to business as usual.  Financial profits and risk taking are back in fashion while consumers are spending again and taking on lots of consumer debt.   

Individual statistical data is still all over the map as jobs data, vehicle sales and housing prices continue to swing violently up and down.  

However, two major developments continue to spell doom for the economy.  First of all, as the Financial Times recently pointed out, the idea that the economy has recovered is laughable as long at countries continue to hold interest rates to near zero.  Second, though the G20 doctrine of austerity makes little to no sense and has been abandoned by several countries, the US is trudging ahead with plans to institute massive cuts to welfare programs and spending.

The people who caused the crisis are still making the policies for fixing it and the results have so far been disastrous.

Today's Company: Magna International

Magna International is one of Canada's largest companies and has been one of the hottest media co-op consumer (manufacturing) stocks in the last 6 months.

Started in 1957 in Toronto under the name Multimatic, it merged with an electronics company in the late 60's and became Magna International in 1973.  

Magna's main business is auto-parts and car manufacturing. Its Magna Powertrain and Magna Steyr divisions manufacture parts or cars for over 40 automakers and develop special electric car projects.  It sells close to $23.5 billion in parts and has 92,000 employees in 25 countries.

It recently invested over $100 million in a 30th Mexican car manufacturing plant adding 700 jobs to a workforce that numbers around 16,000 employees in the country.  It employs 17,000 in Canada.

The workers that it does employ have had quite the time facing off against Magna.  Though the Wikipedia page for Magna's founder and chairman Frank Stronach says he was at one point a labour activist, it's difficult to accept given Magna's recent labour relations.  

700 workers at Magna plants in Mississauga, London and Windsor recently voted in favour of contracts they rejected 6 months earlier.   90 per cent accepted an agreement which had been rejected by 60 per cent of the same voters before.  All three plants are part of the  “Framework of Fairness” program agreed to by Magna and the Canadian Auto Workers Union in 2007.  The program saw the union give up the right to strike in exchange for access to organize other Canadian Magna plants and the inability for management to lock out workers.

Magna also rules Austrian work places with an iron fist,  preventing them from forming 'work councils', even though debates rage about whether or not their tactics are allowed under Austrian law.  

Magna took quite a beating during the recession when vehicle sales plummeted. However it was also extremely active in terms of acquisitions and mergers at that time.  In 2009, Magna tried to buy car manufactures Opel (German) and Vauxhall (UK) from General Motors.  Though the deal was approved by the German government and shareholders the GM board decided to nix the deal 6 months later.

Around the same time, Oleg Deripaska, a Russian billionaire with close ties to Russian Prime minister Vladamir Putin tried to buy a $1.5 billion stake in the company.  Deripaska, whose main business interests include real estate, manufacturing and auto businesses was not able to buy the shares due to problems coming up with the money to buy the stock.

Magna is also heavily involved in the gambling industry through a separated company, MI Sevelopments, which runs horse-race tracks and internet betting sites in North America, Australia and Europe.  MI Developments has entered bankruptcy protection in the US.

Aside from being well known for auto parts, union-busting and gambling, Magna is also extremely well known in political circles.

Founder Frank Stronach ran for the Liberals in the 1988 federal election and lost, but still has extensive ties within the Ontario Provincial Liberal and Progressive Conservative parties.  

His daughter Belinda Stronach was a contender for the Conservative leadership and helped fuse the Reform and Progressive Conservative parties into the new federal Conservative party.  After facing an extreme amount of focus on her personal life, fashion choices and ties to Magna's political machine, she finished second to Stephen Harper in leadership voting and won a federal seat in Ontario.

Her relationship with Harper soured soon after and saw her crossing the floor to the Federal Liberals in 2005 and immediately joining Prime Minister Paul Martin's cabinet.  She faced a heavy amount of sexism from the media and Conservative MPs who publicly referred to her as a 'dipstick', 'whore', 'prostitute' and 'bitch'.  In 2008 she left federal politics and returned to Magna as its executive vice-chairman.

In addition to the Stronach's, other major Canadian political players have been involved with Magna as corporate directors including Former Ontario uber-right Premier, Mike Harris, former Newfoundland & Labrador Premier Brian Tobin, and former federal Liberal minister and University of Windsor Chancellor Ed Lumley.

Stronach has recently relaxed his control of Magna by selling all of his preferred voting shares back to the company.  However, the deal paid Stronach a lot more than many think he should have gotten.  When the Ontario Securities Commission looked into the deal they found that, instead of being negotiated by the board of directors (who would look out for their shareholders interest), the deal was negotiated by senior managers who, according to the Commission had a “fundamental conflict of interest” in giving Stronach a larger payout than normal.

Though the Commission's staff, major shareholders and the three panelists charged with investigating the deal all had major issues with the deal (and even considered stopping it), they allowed it to go ahead stating they had a lack of evidence.

The reason for the lack of evidence?  The panel had expansive power to ask questions, demand more hearings and require more evidence.  

For some unexplained reason, they never did.  

We bought Magna shares for $41.31 in September.  Shares are up thanks to rebounding sales post-recession and now sit at  $57.45 for a gain of 39% or $387.


September: Potash Corp

September #2: Suncor and ARC Energy Trust

October: Shoppers Drugmart and Barrick Gold

October #2: Scotiabank and Power Corporation of Canada

November: Cameco Corp and TransCanada Corp

December: Saputo and Bombardier

December #2: First Quantum and Manulife Financial

January: Quarterly report

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