Auto supply giant Magna International Inc. is preparing to spin off two more business units into independent companies that it says can grow faster and stronger on their own than as part of a larger whole.
Observers expect the soon-to-be independent interiors unit to be aggressive about making acquisitions. While the unit has about US$3 billion in annual sales, it's far smaller than rivals Lear Corp. and Johnson Controls Inc.
"There may be some companies coming up on the auction block soon that may interest them," said analyst Scott Upham, president of Providata Automotive of Ann Arbor, Mich.
The pending split of Magna Interiors and Magna Steyr will follow the example set by the previous spinoff of the Aurora, Ontario-based company's Decoma International Inc. and Tesma International Inc.
The company believes the "super groups" will be more agile, have greater access to outside capital and be more likely to invest in independent acquisitions.
"The individual parts will be more profitable," said Magna founder and Chairman Frank Stronach in a Feb. 22 conference call.
The new Magna Interiors unit will include a variety of plastics-intensive operations, including instrument panels, interior trim, the Atoma Closures and Electronics division and seating.
Don Walker is stepping down as Magna's president and chief executive officer to head the new Magna Interiors unit.
The division's sales are well behind interior specialists Lear, with more than $12 billion in sales, JCI's $11 billion and even French supplier Faurecia, which will have more than $6.5 billion in interior sales with its acquisition of Sommer Allibert SA.
But the Canadian company has the capability to grow, Walker said, and as an independent unit will not have any distractions to stop it from hitting its potential.
"The new interiors group, although it is not as big as others in the interiors business ... has good people and is well-positioned to take advantage of the sourcing opportunities that exist today," he said.
Providata's Upham said one acquisition target could include the seating unit of Dearborn, Mich.-based Visteon Corp., which announced in January that it was evaluating its long-term plans for the business. The company has not decided if it will sell the business, said spokeswoman Liane Smyth.
If the seating program went on the market, Magna and Faurecia could be interested, Upham noted.
Walker is not making any commitments.
"There are lots of different strategies," he said. "Some people will have different strategies than others."
Magna will consider purchases that will give it new technology or access to new customers, he said.
Magna aims to spin off the divisions through an initial public offering but has not set a date yet. That will depend on how the market fares through the last half of this year, said President and Chief Operating Officer James Nicol. The interior unit will be the first to go out on its own.
The parent company will retain a majority of the stock in the new companies, just as it does for its previous spinoffs, he said. It also will create an executive strategy committee, chaired by Walker, to oversee actions of the individual business units and seek out potential alliances even after any spinoff — and ensure the corporation is more than a mere holding company.
It is clear that Magna is putting a lot of managerial weight behind the proposed split and the new independent units, Upham said.
"What's interesting is Mr. Walker's involvement with [interiors], rather than remaining with Magna International," Upham said. "He's taking this matter upon himself and making this one his baby."
Involvement by upper management gives those companies all the more incentive to grow and improve, seeking out possible purchases to expand either technical or customer reach, Nicol said.
"We believe the interior group has the potential to be one of the top global companies for complete interior suppliers," he said. "Each entity can adopt its own strategy.
"In addition, the shares of each [company] can be used as a currency to acquire companies in its own area."
Expanding business units through a spinoff is a different approach, Upham said, but one that has proved successful for Magna in the past.
"The [automakers] and the suppliers are really shifting their thought patterns out of the stagnant, rust-belt thinking on ways to grow," he said. "They're really starting to think out of the box now and seeing that it can make sense to have a decentralized management system."
Magna spun off Decoma in 1998 to create a company that could focus on becoming a complete exterior module supplier. Decoma listed nearly US$550 million in sales in 1999. Late last year it arranged to take over Magna's remaining exterior plastics operations, a move boosting its annual sales to an estimated US$1.7 billion.
Tesma International now is an $800 million supplier of engine parts and fuel systems.
"The success of Tesma and Decoma has proven the success of this strategy," Nicol said.
"This brings our management teams close to the action," Walker added. "We hope to get the brain power working of every person in this organization to allow us to create many Magnas in the future."
Belinda Stronach — the daughter of the company founder — will take over as CEO of Magna International. Magna Steyr, which will be headed up by former Magna Europe President Siegfried Wolf, produces chassis systems.