Tuesday, May 08, 2007

JANA To Alcoa (AA): Don't Buy - Sell

Alcoa (NYSE: AA) shareholder JANA Partners LLC called upon Alcoa's Board of Directors to drop its efforts to acquire Alcan Inc. (NYSE: AL) and to instead focus on creating value for shareholders through an exploration of strategic alternatives, including potentially a sale of Alcoa to one or more buyers.

In a letter sent today to Alcoa Chairman and CEO Alain J.P. Belda, JANA Managing Partner Barry Rosenstein stated that, "Given Alcoa's long history of failing to generate shareholder value through acquisitions, we believe that its greatest value can be realized through a sale or break-up of the Company."

JANA said it was a "large shareholder" of Alcoa, but did not disclose the exact size of their stake. The firm did not show an Alcoa stake in the latest 13F (Dec 31, 2006).

A Copy of the Letter:

As a large shareholder of Alcoa Corporation ("Alcoa" or the "Company"), we were shocked by yesterday's announcement that the Company will make a hostile offer for Alcan Inc. at a large premium. Given Alcoa's long history of failing to generate shareholder value through acquisitions, we believe that its greatest value can be realized through a sale or break-up of the Company. Furthermore, we believe that most new shareholders have been attracted to the Company's stock for the same reason and not as the result of any confidence in management's skill as acquirers. By the same token, we assume that yesterday's rise in your share price has more to do with speculation that Alcoa is a target than its acquisition plans. In short, we believe Alcoa should immediately cease its ill- advised pursuit of Alcan and begin a review of all strategic alternatives to maximize shareholder value, including a sale of the Company.

Yesterday's announcement demonstrates in our opinion a blatant disregard on the part of Alcoa's Board of Directors (the "Board") for its duty to pursue maximum value for shareholders, particularly given what appears to be a concentrated effort to stymie shareholder input on this matter. We believe that the Board has done its shareholders a disservice by carefully designing its offer so as not to require the approval of Alcoa's shareholders and announcing it only weeks after Alcoa's annual meeting of shareholders, where shareholders could have voiced their displeasure. In fact, we agree with observers who have noted that the proposed acquisition appears designed to ward off the unwanted advances of potential suitors for Alcoa, which we believe runs directly counter to the wishes of your shareholders.

Alcoa's failure to generate value from past acquisitions is painfully clear. For example, the Company's acquisition of Reynolds and Ivex failed to generate returns above the Company's cost of capital, and now the Company is exploring strategic alternatives for the packaging business developed through these acquisitions. Likewise, the Company's soft-alloy extrusion business, which was also built in large part through acquisitions, has grown to generate over $2 billion in annual sales but generates little or no operating income and will also be sold. Most telling, despite these and other large acquisitions, the Company's stock price has been stagnant. From its high point in January 2001, when you assumed the position of Chairman of the Board in addition to the CEO role, through last Friday prior to the announcement, Alcoa's stock price has been essentially flat, despite the occurrence of one of the biggest metals booms in decades during this period. We believe a major transformational acquisition is a particularly inappropriate sign-off to your tenure as Chairman and CEO next year. Moreover, a management team which has failed to generate shareholder value through acquisitions should not be rewarding itself by aggregating more such assets.

We believe management's refusal on yesterday's call to share even the most basic assumptions used to justify the proposed acquisition, such as the projected price of aluminum used to determine whether the transaction would be accretive to earnings, underscores the tenuous reasoning behind pursuing this transaction rather than other strategic alternatives. We are also highly skeptical that Alcoa's underperforming management team can achieve the proposed $1 billion in cost savings from the proposed transaction. Moreover, we find it appalling that, by your own admission on yesterday's call, the Board did not even consider whether more value could be created for shareholders through a break-up of the Company before deciding to pursue Alcan.

For these reasons, we call on the Board to abandon this misguided effort and pursue other strategic alternatives, including potentially a sale of the Company to one or more buyers. We are confident that should the Board insist on pursuing this acquisition rather than pursuing maximum value for its shareholders through all possible means, Alcoa's shareholders will respond forcefully at next year's annual meeting, including if necessary by replacing members of Alcoa's Board of Directors.


Barry Rosenstein
JANA Partners LLC
Managing Partner

Jared Sturdivant
JANA Partners LLC
Managing Director

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