With Magna International's $1 billion buyout of founder Frank Stronach now a done deal, the auto parts maker will now shift its focus to a more aggressive expansion in emerging markets.


Magna International Inc. Chairman Frank Stronach listens to journalists questions after receiving the Josef Schumpeter award in Vienna June 10, 2010.

The company, which last year failed in a bid to take over GM's Opel business, could also end up a takeover target itself, according to at least one analyst.

Stronach will remain chairman of Magna while giving up voting control. A more independent management team will have the freedom to pursue a more ambitious growth plan, said David Whiston, an analyst at Morningstar.

They will be pretty aggressive in their acquisitions over the next couple of years because their balance sheet is so healthy and they are certainly looking to diversify away from North America and Western Europe, he said.

Magna said on Tuesday it would implement its plan to eliminate its dual-class share structure. After the market close, it will pay the 77-year-old Stronach about $1 billion in cash, common stock, and other benefits in return for his controlling class B shares.

Stronach started Magna in a small Toronto garage in the 1950s. In the 1970s, he won a shareholder vote to create class B shares that carried 300 votes each and enabled him to control the company.

On occasion he took Magna in directions that raised the ire of shareholders and kept potential investors away, including side projects like the now-bankrupt Magna Entertainment horse track and entertainment venture.

Now that Stronach is out of the driver's seat, analysts say that Aurora, Ontario-based Magna's sights will be set exclusively on the auto parts sector.

Emerging markets such as China and South America, and new technology will probably be the main targets, said Michael Willemse, an analyst at CIBC World Markets.

CIBC was an adviser to Magna's board's special committee that put together the Stronach deal.


Magna was sitting on $1.7 billion in cash and $2 billion in credit at the end of June.

In the early 1990s, a high debt load and rapid expansion nearly crippled the company. Once it successfully restructured, Stronach made a point of keeping ample cash on hand.

Willemse said Magna's management would now look to use their capital more efficiently.

They will work on reducing their cash balances through acquisitions, strategic investments, increased dividends, and perhaps share buybacks.

Shares of Magna have risen nearly 30 percent since May when the plan came to buy out Stronach came to light. However, many analysts still see the company as undervalued.

I definitely see much more upside potential, said David Tyerman, an analyst at Canaccord Genuity, who pointed to Magna's last two quarters, which both came in well ahead of estimates.

He said he thinks people are taking a wait and see approach to see if the recent strong results are sustainable.

Willemse said the longer the company's valuation remains depressed, the more likely a takeover target it becomes.

Magna has a market cap of around $8.7 billion, which has led some analysts to say that it is too big to be taken over.

But Willemse pointed to Tomkins, one of Britain's biggest industrial groups, which was sold for $4.5 billion this summer, and the recent $40 billion bid for Canada's Potash Corp.

It does show that billion dollar acquisitions are still happening, he said.

Magna has historically traded at a discount to its peers because of investor concerns over Stronach's leadership and the annual consulting fees he receives from the company, which have run into the tens of millions of dollars.

You won't see any of that criticism going forward, said Whiston. It means they can go back to just focusing on being a parts supplier and not have to worry about these governance issues.

Willemse has a price target of $108 on the stock, Whiston's target is $98, and Tyerman's is $107.

Magna's stock was up 3.8 percent at C$82.66 on the Toronto Stock Exchange on Tuesday afternoon.

($1=$1.06 Canadian)

(Reporting by John McCrank; Editing by Frank McGurty)