Alcoa's No-Holds-Barred Takeover Bid

The aluminum giant's quest to nab Canadian rival Alcan for $27 billion is evidence of the current hunt-or-be-hunted business climate

by Steve Rosenbush

Alcoa's (AA) $27 billion hostile bid for Alcan (AL) reflects the eat-or-be-eaten nature of today's business environment. Alcoa announced the offer on May 7, after two years of efforts to negotiate an acquisition on friendly terms. The decision to go hostile in a cross-border deal laden with political and regulatory obstacles reflects the intense pressure facing Alcoa.

A company like Alcoa, with a strong market position and a $33 billion market cap, might have felt relatively secure in its independence just a short time ago. That's not the case anymore. "The size of transactions is going up and valuations are increasing. A lot of companies that would not have been in play six months ago now find themselves in the sites of some financial and strategic buyers," said William Wexler, managing director at Detroit-based business advisory firm BBK.

Almost any company is a potential takeover target. There have been reports that private equity companies are contemplating a buyout of Home Depot (HD), a $76 billion company that would easily set a new record for buyouts. Alcan and Alcoa, with their respective market caps of about $33 billion each, are easy targets by comparison.

Once the world's largest aluminum company, Alcoa lost that title in March when Russian rivals Rusal and Sual Group merged to form an approximately $30 billion privately held company. Alcoa was the subject of acquisition rumors in February, when Melbourne's BHP Billiton (BHP) and London's Rio Tinto (RTP) reportedly mulled a $40 billion takeover bid for the company. BHP may have backed off because of the complexities of a hostile deal.

Planning Needed

Alcoa could help preserve its independence by acquiring Alcan. But the remedy carries risks and challenges of its own. An acquisition of Alcan, a Canadian company based in French-speaking Montreal, would be a true cross-border transaction. It could face political resistance in Canada, and antitrust reviews in the U.S., Canada, Europe, and other markets around the globe. The company says it will have to spin off assets in several markets to complete the deal.

Alcoa's bid for Alcan underscores the increasing importance of another skill set in these mega-takeovers: integration planning. Not so long ago, companies vetted possible acquisition targets by examining their financial and strategic fit. "The increased volatility in the deal space means that integration planning is far more important than it was two years ago. Corporate boards are far more demanding when it comes to approving [merger-and-acquisition] decisions, even though that analysis must happen on a compressed time frame," says Jeff Perry, the integration practice leader at Ernst & Young Transaction Advisory Services. Perry says integration planning should begin while negotiations or pre-announcement deal analysis are under way.

Management Challenges

Alcoa has given some thought to integration issues. "Alcoa has completed a number of large acquisitions in recent years and we have a proven track record of successfully integrating companies to generate shareholder value," said Alcoa Chief Executive Officer Alain Belda in a prepared statement. Alcoa would honor Alcan's plans to expand its business, and Montreal and New York would serve as dual headquarters. The company's research and development and primary products business would be based in Montreal.

But integrating Alcan might not be that easy. It would be the largest and most complex deal in Alcoa's history. The dual-headquarters concept might not be the best approach to smoothing over the tensions of a hostile takeover, either. Perry says he cannot comment specifically on the prospects of an Alcoa-Alcan transaction. But in general, he says, the benefits of a clear management structure often outweigh the divvying up of power.

M&A certainly can help companies maintain their independence. But the ultimate gauge of a deal's success is whether the transaction improves the companies' underlying business. For increasingly large cross-border deals, the bar for success is getting higher all the time.

Rosenbush is a senior writer for BusinessWeek.com in New York.