Corporate Split - Alcoa & Arconic
Download the case study on Alcoa & Arconic
(Now, ARCONIC has decided to severe the investment interests in ALCOA. Read the following recent news on both companies. Complete split does not seem to have any drastic impact on stocks of both firms. https://finance.yahoo.com/news/elliott-management-releases-letter-arconic-113600307.html)
Alcoa (Aluminum Corporation of America) is a global leader in lightweight metals technology, engineering and manufacturing, Alcoa innovates multi-material solutions, and its technologies enhance transportation, from automotive and commercial transport to air and space travel, and improve industrial and consumer electronics products. Alcoa’s products enable smart buildings, sustainable food and beverage packaging, high-performance defense vehicles across air, land and sea, deeper oil and gas drilling and more efficient power generation. Alcoa pioneered the aluminum industry over 125 years ago, and it employs 60,000 people in 30 countries delivering value-adding products made from titanium, nickel and aluminum, and produce best-in-class bauxite, alumina and primary aluminum products. In 2015 Alcoa’s sales revenue was about $22 billion.
In early 2016 Alcoa’s management announced that its Board of Directors has unanimously approved a plan to separate Alcoa into two independent, publicly-traded companies, culminating Alcoa’s successful multi-year transformation. The separation will launch two industry-leading, Fortune 500 companies. The globally competitive Upstream Company will comprise five strong business units that today make up Global Primary Products - Bauxite, Alumina, Aluminum, Casting and Energy. The innovation and technology-driven Value-Add Company will include Global Rolled Products, Engineered Products and Solutions, and Transportation and Construction Solutions.
The completion of split is expected to be completed in the second half of 2016. At that point Alcoa shareholders will own all of the outstanding shares of both the Upstream and Value-Add Companies. The separation is intended to qualify as a tax-free transaction to Alcoa shareholders for U.S. federal income tax purposes. Both autonomous businesses will attract an investor base best suited to their unique value proposition, management, operational and financial traits. After the separation, the Upstream Company, with its strong history in the aluminum and alumina markets, will operate under the Alcoa name. The Value-Add Company will be named differently prior to completion of separation.
According to press release, Klaus Kleinfeld CEO of Alcoa states “In the last few years, management has successfully transformed Alcoa to create two strong value engines that are now ready to pursue their own distinctive strategic directions.” “After steering the Company through the deep downturn of 2008, we immediately went to work reshaping the portfolio. We have repositioned the upstream business; we have an enviable bauxite position and are unrivalled in Alumina, we have optimized Aluminum, flexed our energy assets, and turned our cast-houses into a commercial success story. The upstream business is now built to win throughout the cycle. Our multi-material value-add business is a leader in attractive growth markets. We have intensified innovation, made successful acquisitions, shed businesses without product differentiation, invested in smart organic growth, expanded our multi-materials profile and brought key technologies to market; all while significantly increasing profitability.” Mr. Kleinfeld concluded, “Inventing and reinventing has defined our Company throughout its 126-year history. With the unanimous support of Alcoa’s Board we now take the next step; launching two leading-edge companies, each with distinct and compelling opportunities, and each ready to seize the future.”
When companies usually go for mergers, acquisitions and complete integration of acquired portfolios for achieving growth, Why have Alcoa’s management decided to split the organization. What benefits would result in for management, shareholders and customers? Can the firm continue to sustain economies of scale and synergy after the split? What economic and management rationale would substantiate this decision?
Shoaling design can be practiced at corporate governance, product or business unit level, production organization or alliance and franchise management. School-of-Fish Strategy not only eliminates opportunity cost of losing emerging markets, but also reduces investment risk associated with large-scale integration. School-of-Fish formation enables multi-pronged competitive strategies permitting a firm to develop unique or optimal strategy for each rival it encounters in the respective market or region. School of Fish Strategy is not only lean, but can enhance quality, customization, product variety, quality of work life (QWL), quality of life, and overall sustainability of enterprise.
Alcoa’s transformation and separation into two leading public companies, in November 2016, is an excellent business case for Shoaling or School of fish strategy. How this split and transformation at the corporate governance level and operating in a shoaling form of two different companies will helping the giant industrial-age company to achieve innovation, growth, quality and value creation will be an important strategy lesson. Within one year of the split, market has expressed confidence in the firm creating more value shareholders. Alcoa’ new decision and resulting operational consequences will reveal how this new structure enables reducing bureaucratic cost, transfer pricing practices to achieve value maximization, providing autonomy to businesses (units) to achieve organic growth through market and product innovation, and repositioning. The decision to split the corporation to launch two strong standalone companies is Providing Shareholders with Two Distinct, Value-Creating Investment Opportunities. The Upstream Company to be a highly competitive global leader in bauxite, alumina and aluminum, with a unique portfolio of value-adding business units, and substantial energy assets. The Value-Add Company will be a premier innovator of high performance multi-material products and solutions in attractive growth markets.
The Upstream Company
After the separation, the Upstream Company will be a cost-competitive industry leader in bauxite mining, alumina refining and aluminum production, positioned for success throughout the market cycle. The company’s footprint will include 64 facilities worldwide, and approximately 17,000 employees. Revenues for the 12 months through June 30, 2015 totaled $13.2 billion, with $2.8 billion in EBITDA. It will be committed to disciplined capital allocation and prudent return of capital to shareholders. Global aluminum demand is expected to grow 6.5 percent in 2015 and double between 2010 and 2020; so far this decade, global demand growth is tracking ahead of this projection.
The Upstream Company will be well-positioned to meet this robust demand. The Upstream Company’s world-class asset base will include the world’s largest bauxite mining portfolio, with 46 million bone dry metric tons of production in 2014. It has a low 19th percentile position on the global bauxite cost curve. With proximity to owned refinery operations, its mining reserves will provide a consistent supply of low-cost bauxite. Alcoa has been building its third-party bauxite business and is well-positioned to meet growing global demand.
The Upstream Company’s alumina refining system will be the world’s largest, with operations well positioned to serve major adjacent growth markets in Asia, the Middle East, and Latin America. It has a 25th percentile, first quartile position on the global alumina cost curve, with a target to reach the 21st percentile by 2016. The company will be the world’s fourth largest aluminum producer with a highly competitive second quartile cost curve portfolio. It will have an unrivalled value-add cast-house network in close proximity to customers, and a substantial portfolio of energy assets with power production capacity of approximately 1,550 megawatts with operational flexibility to profit from market cyclicality.
Alcoa has aggressively reshaped its Alumina and Primary Metals segments, closing, divesting or curtailing 1.4 million metric tons, or 33 percent, of total smelting operating capacity since 2007. As a result, Alcoa has dropped eight points on the global aluminum cost curve since 2010 to the 43rdpercentile, and is targeting the 38th percentile by 2016. Additionally, Alcoa has secured approximately 75 percent of smelter power needs through 2022.
Alcoa has also steadily grown its offering of differentiated, value-add aluminum products that are cast into specific shapes to meet the needs of customers. The Company has grown total value-add product shipments from its smelters from 57 percent in 2010 to 65 percent in 2014, delivering $1.3 billion in total incremental margin. In 2015, value-add products are projected to represent approximately 70 percent of smelter shipments. Alcoa has also invested in the most advanced, low cost integrated aluminum complex in the world in Saudi Arabia, with the refinery and smelter now fully operational. Alcoa reformed pricing in the alumina market in 2010 by introducing the Alumina Price Index (API) to sell smelter-grade alumina based on alumina market fundamentals rather than London Metal Exchange pricing. In 2014, 68 percent of Alcoa’s total third-party smelter-grade alumina shipments were based on API/spot market pricing. That is projected to grow to approximately 75 percent in 2015. Additionally, the Upstream business has achieved productivity gains of approximately $3.9 billion between 2009 and 2014.
The Value-Adding Company
After the separation, the Value-Add Company will be a premier provider of high-performance multi-material products and solutions with 157 globally diverse operating locations and approximately 43,000 employees. Pro-forma revenues for the Value-Add Company for the 12 months through June 30, 2015 totaled $14.5 billion, with $2.2 billion in pro-forma EBITDA. As Alcoa has transformed, EBITDA margins for the value-add portfolio have increased from 8 percent in 2008 to 15 percent in 2015 on a pro-forma basis for the twelve months through June 30, 2015. The overall contribution of the value-add portfolio to Alcoa’s after-tax operating income has more than doubled from 25 percent in 2008 to 51 percent in 2014. EBITDA margins in the combined downstream segments (Engineered Products & Solutions, Transportation & Construction Solutions) have increased from 14.6 percent in 2008 to 20.9 percent in 2014, and in the midstream (Global Rolled Products) from $108 per metric ton in 2008 to $289 per metric ton in 2014.
The Value-Add Company will be positioned for profitable growth by increasing share in fast growing end markets and leveraging significant customer synergies across the midstream and downstream portfolios. The company will be a differentiated supplier to the high-growth aerospace industry with leading positions on every major aircraft and jet engine platform, underpinned by market leadership in jet engine and industrial gas turbine airfoils, and aerospace fasteners. Approximately 40 percent of the company’s pro-forma revenues for the 12 months through June 30, 2015 came from the aerospace market. The company will also be at the forefront of capturing demand for aluminum intensive vehicles through Alcoa’s recent rolling mill capacity expansions and the commercialization of breakthrough technologies such as the Micromill. Automotive revenues are expected to increase 2.4 times from 2014 to $1.8 billion in 2018. Additionally, the Value-Add Company will be an unparalleled leader in aluminum commercial truck wheels and will hold the number one market position in North American architectural systems. Future profitable growth will be supported by a full pipeline of innovative products and solutions, and the pursuit of investment opportunities that provide a return above the cost of capital.
The Value-Add Company and Upstream Company will have distinct value profiles with the ability to effectively allocate resources and deploy capital in-line with individual growth priorities and cash-flow profiles. As independent entities, each company will be positioned to capture opportunities in increasingly competitive and rapidly evolving markets. The separation will enable both the Value-Add Company and Upstream Company to pursue their own independent strategies, pushing the performance envelope within distinct operating environments.