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The Corporation: Strategies
Alcoa Wants One of These, and One of Those...
The aluminum giant's recent acquisition tear has shareholders unsettled
Last March, Alcoa's Alain J.P. Belda knocked investors for a loop. Belda, who had become chief executive of the world's biggest aluminum producer just 10 months earlier, announced an agreement to pay $2.9 billion in cash for Cordant Technologies Inc., an aerospace and alloys company best known for building rocket engines for the Space Shuttle. "What the hell is this company doing buying Cordant?" Richard Aldrich, a metals analyst at Lehman Brothers Inc., recalls thinking as Alcoa's share price crumpled, draining $1.25 billion from the company's market cap in a day. "It was a shocker."
Attention Alcoa Inc. stockholders: Brace yourselves for another jolt or two. There are bound to be more Cordants in Alcoa's future. Belda is on a mission to turn Alcoa into a $40 billion company by 2004. Thanks to a string of acquisitions this year, topped by a $4.8 billion takeover of Reynolds Metals Co. in May, he's well on the way. Alcoa expects to report revenues of about $24 billion this year, up nearly 50%, from $16.4 billion in 1999. Belda insists there's more room for aluminum deals. But antitrust authorities will certainly block any additional U.S. aluminum market share. The Reynolds deal got approval only after Alcoa agreed to sell plants on three continents.
That means Belda, a 57-year-old Brazilian, has to look outside Alcoa's core interests to hit his magic number. And he'll need to do a masterful sales job on Wall Street. He believes rapid expansion can keep Alcoa from ossifying and free it from commodity price swings. And he argues that Cordant, with its expertise in rocket and jet components and high-performance metal alloys, gives Alcoa a chance to sell sophisticated parts as well as aluminum to big aerospace and aircraft makers. Indeed, Alcoa's shares bounced back some within days of the Cordant deal.
Clearly, Alcoa picked a good time to go on an acquisition tear. Aluminum prices jumped nearly 40% last year on rising demand and temporary cutbacks in production. The company's stock price leaped 122% in 1999--the top gain for a stock in the Dow Jones industrial average. Besides rising prices, the runup reflected Alcoa's impressive track record of squeezing costs out of acquisitions and imposing disciplined purchasing, information technology, and logistics systems. "The idea is that when we bring in these companies, they can plug and play," Belda says. Merrill Lynch & Co. analyst Daniel A. Roling expects earnings to grow even faster than sales this year--by 71%, to $1.8 billion.
But Belda hasn't freed his company from price swings yet. This year, Alcoa's shares sank, along with aluminum prices, which fell 9% in the second quarter. Alcoa, though, didn't get hurt as much as other metals companies. Now trading around 33, its shares are down 21% for the year--compared with a 48% dive for USX Corp.'s U.S. Steel Group, also based in Pittsburgh. Says William N. Chapman, an analyst at Key Asset Management, which owns 3.8 million Alcoa shares: "We got into Alcoa as a commodity play, but we have held on to it because the acquisition strategy has benefited the bottom line so nicely."UPGRADING TALENT. Under the tutelage of Belda and his immediate predecessor, current Chairman Paul H. O'Neill, management has perfected ways to reduce overhead as the company grows. Since mid-1998, Alcoa has chopped annual expenses by $1.1 billion, chiefly by eliminating duplicate functions at acquired units, while sales grew by more than 50%. Belda says his managers have spotted a further $425 million they can save from Reynolds and Cordant.
But rather than just hack away at redundant jobs, Belda uses each new company to upgrade talent. Everyone gets a shot at a new post as operations are merged. The best get promoted. The losers get the boot. For instance, after Alcoa bought Alumax Inc. for $3.8 billion in March, 1998, management realized that the Alumax sales people had a broader client list. Today, they dominate the combined sales force. "We're putting new DNA into the mix," says Richard B. Kelson, Alcoa's chief financial officer.
The resulting uncertainty can hurt morale. "What's going to happen to all the people who brought Alcoa this far?" frets John Murphy, director of the aluminum, brick, and glass division of the United Steelworkers of America. But Belda argues that such flux fosters an entrepreneurial culture that's atypical in industrial giants. "By growing like we are, you encourage people to take their anchors up," he says.
That fresh approach has paid off in several key productivity innovations. For instance, Alcoa used to behave like other commodity producers, cranking out as much as it could to cover the huge capital costs of its plants. That helped glut the market, depressing prices. Now, Alcoa makes products only when it has orders. The system, part of a production scheme copied from Toyota Motor Corp., cuts turnaround times for products that fit specific customer needs.
Meanwhile, despite chopping its research staff from 1,500 to 600 over the past six years, the company recently developed new materials to carry electrical charges in aluminum smelting. The process, if it passes field tests, would cut capital costs by 25% to 30% throughout Alcoa's smelting operation.
The key question now is, can Belda make good on his top-line growth goals? Recent moves by auto makers to increase gas mileage will probably result in substituting more lightweight aluminum for iron and steel. Consumption is spreading in developing nations, and Alcoa is in talks with governments in China and Egypt about joint ventures. Moreover, worldwide prices are starting to pick up again. After dropping below 70 cents a pound last spring, aluminum prices should rise to 80 cents by yearend, says Merrill's Roling.
But realistically, Belda needs at least a couple of additional big acquisitions to reach his sales target. Alcoa's got plenty of cash. But U.S. antitrust authorities aren't likely to let Alcoa buy any more big aluminum rivals. Already, the Justice Dept. has ordered Alcoa to sell refineries and smelters, including an interest in an Australian alumina refinery. There could still be some opportunities in Europe. Last month, Belda purchased two small aluminum companies in Britain. But that window is barely open: In the spring, European Union regulators blocked Canada's Alcan Aluminium Ltd. from a merger with two European companies as the No. 2 producer tried to keep pace with Alcoa.OPEC-LIKE. Small competitors are already screaming about Alcoa's growing dominance. "The problem with the Alcoa business model is they are becoming the OPEC of the aluminum business," gripes Michael W. Lynch, chairman of McCook Metals LLC, a suburban Chicago partnership that makes aluminum plate and wing skins for Boeing Co. Before Alcoa acquired Reynolds, McCook bought all its unprocessed aluminum from Reynolds. Now, it must buy its raw materials from its foe, which Lynch estimates controls at least 55% of the primary aluminum market in North America. He is now suing Alcoa to keep supplies coming at a fair price.
With fewer options in Aloca's historic markets, Belda will have to consider more Cordant-like deals. He has been making the rounds of Wall Street trying to win over analysts and investors. He points out that even before Cordant, Alcoa got 20% of its business outside aluminum, making such things as plastic bottle caps and fiber-optic cable. Now Alcoa's sales force can sell a big aerospace customer superhard castings for jet engine parts, from Howmet International Inc., which was 85% owned by Cordant, or fasteners from Cordant's Huck International division. "Those two will help us extend our reach," he says.
Makes sense, say analysts. But they scratch their heads over what Belda plans to do with Cordant's Thiokol space unit. And they worry that Belda will stray farther afield, making those vaunted efficiencies harder to achieve. "If he tries to pick up $10 billion in revenue by buying businesses completely foreign to his, Alcoa stock will be cut in half," warns John Tumazos, an analyst at Sanford C. Bernstein & Co. He adds: "I think the man is smart enough not to do that." Still, Wall Street has made clear that Belda's high standing extends only as far as his next deal.By Michael Arndt in PittsburghReturn to top