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Amid the recent carnage in the mining and metals sector, many commentators have pointed to the granddaddy of foolish deals, Rio Tinto PLC's $38-billion (U.S.) takeover in 2007 of Alcan Inc. just as aluminum prices were peaking. It's a shame Alcan has come to represent the biggest disaster during an era of overpriced acquisitions after CEOs and boards misjudged the sustainability and fortitude of the commodities "supercycle." If Alcan hadn't been bought, it would have been the industry giant everyone would be holding up today as the one that played the bubble correctly.
Remember, Alcan passed on bidding for Inco Ltd. and Falconbridge Ltd. in the mid-2000s, believing that it was the wrong time to buy as metals prices approached top-of-the-cycle peaks. "I didn't know how fortuitous that was at the time," former Alcan chief executive officer Richard Evans told ROB Insight last week. "Had we levered up to do that deal, if we would not have gone bankrupt, we would have been in a very severe period during the downturn."
Alcan wasn't in the business of overpaying for assets. It was a rational and disciplined player in the aluminum market, ever watchful of both supply-demand dynamics and its own costs. "We were prudent in never making investments or acquisitions that were predicated upon above-long-term trend prices," he said. (Compare that with Barrick Gold Corp.'s views about copper prices when it overpaid for Equinox Minerals Ltd. in 2011.)
"Our view was always this is a cyclical industry, and to be successful over the long term you have to be the low-cost producer. If you're in that position, then during good and lean times, you'll benefit: In good times you'll make a pile of money and in lean times you'll be cash flow-break even or positive, and positioned to pick up other assets from others who are weaker financially."
That came to bear when Alcan made well-timed, value-creating acquisitions of aluminum companies Alusuisse Lonza Group AG and Pechiney SA.
This is no 20-20 hindsight – many knew at the time Rio Tinto was vastly overpaying for Alcan, including Mr. Evans. It also renders dubious claims by CEOs that they were blindsided after their top-of-market deals went south: As Alcan showed, rising metals prices are no excuse to go lax on cost controls or overpay for acquisitions.
"It's just a fact that companies that are successful tend to not understand or misinterpret why they're being successful," Mr. Evans said. "I think there is a trend here of the supercycle over five- to seven-year period having convinced a lot of metals and commodity company managements that they were more brilliant than they were."
If Alcan hadn't been bought, this would have been its time to shine. Its stock would be markedly lower than the high $50s where it traded before the company was put into play (Mr. Evans estimates it would be trading in the $30s). But the heart of its empire – cheap hydro-powered processing and smelting operations in Quebec – and its focus on costs would have left it in strong shape to weather the downturn in aluminum prices, and positioned to pick up good assets at affordable prices as others beat their retreats.
Instead, Mr. Evans did what any right-minded CEO would have done in the face of an insanely overpriced, $101-per-share offer: He gladly accepted a fool's cheque on behalf of giddy shareholders. It was the only rational and prudent thing to do, and remains the case.
Sean Silcoff is a contributor to ROB Insight, the business commentary service available to Globe Unlimited subscribers. Click here for more of his Insights, and follow Sean on Twitter at @seansilcoff.