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 because other logical suitors
or potential white knights, such as Canada’s Alcan Aluminium, France’s Pechiney
SA, and Switzerland’s Alusuisse Lonza Group AG, already were involved in the
three-way merger. Alcoa’s bear hug 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, Reynolds’ largest
single shareholder, Highfields Capital Management, a holder of more than 4
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 2 weeks
from receipt of the initial solicitation, and agreed to be acquired by Alcoa.
The agreement contained a 30-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 breakup fee. Alcoa was able to acquire
Reynolds for a puny 3.9% premium to the firm’s closing price of $68.25 as of
the close of August 19.
Case Study Discussion Questions
1. What was the total dollar value of the purchase price
Alcoa offered to pay for Reynolds?
2. Describe the various takeover tactics Alcoa employed in
its successful takeover of Reynolds. Why were these particular tactics
3. Why do you believe Reynolds’ management rejected Alcoa’s
initial bid as inadequate?
4. In your judgment, why was Alcoa able to complete the
transaction by offering such a small premium over Reynolds’ share price at the
time the takeover was proposed?
5. What was the purpose of the breakup fee?