Frank Stronach’s persistence in the face of adversity exemplifies what separates the most successful entrepreneurs from the pack. In the wake of the bankruptcy of Magna Entertainment Corporation–when the assets have not yet been disposed of–Mr. Stronach is again playing a high-stakes game. As chairman of Magna International, the Canadian automobile parts manufacturer that he started in a garage, he is poised to buy Opel from General Motors. The Wall Street Journal (“Magna May Snag Opel”) of May 30-31, 2009, says: “Grabbing Opel would give Mr. Stronach a victory to offset a recent defeat. In March, Magna Entertainment filed for bankruptcy protection and now is trying to sell many of its tracks.”
In Magna International’s first attempt to acquire an automobile company, it was the losing bidder to Cereberus Capital Management for Chrysler. That turned out to be a case of being grateful that you did not get what you wished for. Whew!
The tentative agreement would give Magna a 20 percent position in Opel. Sherbank, the largest Russian state-controlled bank, would have 35 percent. General Motors would retain 35 percent and Opel employees would get 10 percent. The German government would provide (ostensibly) short-term financing of the euro equivalent of over $2 billion.
If Magna were to get Opel, the future would be fraught with risk. Anytime a company engages in vertical integration it increases its vulnerabilities. A good example, among many, is when PepsiCo got into the restaurant business by purchasing Taco Bell, Kentucky Fried Chicken, and Pizza Hut. The theory behind the acquisitions was that the thousands of franchisees and company-owned outlets would be locked into using Pepsi soft drinks. Trouble was, the deal put Pepsi in competition with its own customers, such as Wendy’s. The late Dave Thomas, Wendy’s founder, was irate and kicked Pepsi out of his restaurants and replaced them with Coke. Eventually, Pepsi divested itself of the restaurants, which are known today as Yum Brands, the world’s largest restaurant company and, coincidentally, sponsor of the Kentucky Derby.
Magna would be following the same treacherous path because its Opel brand would be competing with car companies that buy parts from Magna International. Some of them may be offended and/or may not want to share plans for future car models with a parts manufacturer that happens to own Opel.
The Wall Street Journal opines that Magna faces the challenge of having the “marketing savvy” to compete in the retail automobile market. Does this sound familiar? The same concern was there when Mr. Stronach got into the retail horse-racing business.
Mr. Stronach could rest on his reputation and wealth from a long and distinguished business career. But like most other high-rolling entrepreneurs, he won’t, or can’t. Think about the audacity of the Opel venture. A Toronto business tycoon in his seventies is the chairman of an auto parts manufacturer that is reeling from the depression in the North American car business. He recently was forced to take another business, Magna Entertainment, into bankruptcy. Now, instead of waiting out the storm, he is partnering with a Russian bank, far from Toronto geographically and culturally, to buy an automobile brand from a company, General Motors, that is on the verge of collapse and is a ward of the U. S. taxpayer.
I have spent my adult life around entrepreneurs who take the risks that keep the economy going and provide jobs for everyone else. Mr. Stronach is as bold of an entrepreneur as they come and I admire him for it.
Although I have doubts about some aspects of the strategy behind his Opel venture, he has a reasonable shot of succeeding. His background in automobile parts manufacturing provides him with far more expertise in running a retail business pertaining to horsepower of the mechanical genre than it did a retail business centered on equine horsepower.
Copyright © 2009 Horse Racing Business
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