On Monday, September 28, Alcoa Inc. (AA ) announced that it intends to split itself into two new companies, with one focused on the company's more profitable parts-making unit and the other on its raw aluminum operations. The company predicts that there is a global oversupply of the metal for 2015 and that global demand will be at lowest levels in three years, according to Bloomberg.com. Alcoa expects that worldwide production will exceed demand by 326,000 metric tons. In sum, a more competitive aluminum market producing more than ever before coupled with falling demand has pressured Alcoa into splitting itself in two for the sake of profitability.
The move to break up is not unique among large companies, such as General Electric (GE ) and Hewlett-Packard (HPQ ), are splitting in an effort to improve focus and cut costs. Alcoa's raw aluminum business, which has been hit the hardest by falling prices, will retain the corporation's name as a reflection of its heritage as the world's first industrial aluminum producer, according to the Wall Street Journal. The new business, which is unnamed currently, will take over Alcoa's manufactured aluminum products, engineered products, and logistics-and-construction businesses. The new business is expected to have more potential for growth, as automotive companies will be buying more aluminum in order to producer cars that meet stricter emissions standards. Alcoa also believes that 40% of the new corporation's business will come from the aerospace industry, where it produces a variety of necessary parts.
The decision to split Alcoa came following dissatisfaction from large, institutional shareholders with the company's falling stock price. Alcoa lost 40% of its market value in the past year as aluminum prices dived, according to the Wall Street Journal. The company's stock price was up 5.73% from $9.07 to $9.59 following the announcement of the split. Klaus Kleinfeld, current CEO of pre-split Alcoa will go on to serve as chairman and CEO of the new company. Kleinfeld believes that the falling price of aluminum did not drive the decision to split, saying "You can't pin this to the aluminum price", and adding that the alumina-refining portion of the post-split Alcoa is "in really good shape".
Although the new form of Alcoa promises to be run leaner and please shareholders, doubts still linger about its potential. The new corporate structure is of much greater benefit to the as yet unnamed successor company, and the potential for growth is in manufactured aluminum parts, not raw aluminum. As Chinese competition among aluminum producers increases and Chinese demand weakens, Alcoa's position will weaken. The fate of the company is now more than ever tied to the price of raw aluminum, which looks set to fall as foreign competition can compete on a price level that Alcoa cannot.