Alcoa Easily Overwhelms Reynolds’ Takeover Defenses

question 58

Essay

Alcoa Easily Overwhelms Reynolds’ Takeover Defenses

Alcoa reacted quickly to a three-way intercontinental combination of aluminum companies aimed at challenging its dominance of the Western World aluminum market by disclosing an unsolicited takeover bid for Reynolds Metals in early August 1999. The offer consisted of $4.3 billion, or $66.44 a share, plus the assumption of $1.5 billion in Reynolds’ outstanding debt. Reynolds, a perennial marginally profitable competitor in the aluminum industry, appeared to be particularly vulnerable, since other logical suitors or potential white knights such as Canada’s Alcan Aluminum, France’s Pechiney SA, and Switzerland’s Alusuisse Lonza Group AG were already involved in a three-way merger.

Alcoa’s letter from its chief executive indicated that it wanted to pursue a friendly deal but suggested that it may pursue a full-blown hostile bid if the two sides could not begin discussions within a week. Reynolds appeared to be highly vulnerable because of its poor financial performance amid falling aluminum prices worldwide and because of its weak takeover defenses. It appeared that a hostile bidder could initiate a mail-in solicitation for shareholder consent at any time. Moreover, major Reynolds’ shareholders began to pressure the board. Its largest single shareholder, Highfields Capital Management, a holder of more than four million shares, demanded that the Board create a special committee of independent directors with its own counsel and instruct Merrill Lynch to open an auction for Reynolds.

Despite pressure, the Reynolds’ board rejected Alcoa’s bid as inadequate. Alcoa’s response was to say that it would initiate an all cash tender offer for all of Reynolds’ stock and simultaneously solicit shareholder support through a proxy contest for replacing the Reynolds’ board and dismantling Reynolds’ takeover defenses. Notwithstanding the public posturing by both sides, Reynolds capitulated on August 19, slightly more than two weeks from receipt of the initial solicitation, and agreed to be acquired by Alcoa. The agreement contained a thirty-day window during which Reynolds could entertain other bids. However, if Reynolds should choose to go with another offer, it would have to pay Alcoa a $100 million break-up fee.

Under the agreement, which was approved by both boards, each share of Reynolds was exchanged for 1.06 shares of Alcoa stock. When announced, the transaction was worth $4.46 billion and valued each Reynolds share at $70.88, based on an Alcoa closing price of $66.875 on August 19, 1999. The $70.88 price per share of Reynolds suggested a puny 3.9 percent premium to Reynolds’ closing price of $68.25 as of the close of August 19. The combined annual revenues of the two companies totaled $20.5 billion and accounted for about 21.5 percent of the Western World market for aluminum. To receive antitrust approval, the combined companies were required divest selected operations.
-Describe the various takeover tactics Alcoa employed in its successful takeover of Reynolds. Why were these
tactics employed?

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