Alcoa Needs To Raise Alcan Bid

Alcoa's $27 billion hostile bid for Alcan could recreate an aluminum giant. The U.S. and Canadian companies were split due to antitrust concerns 79 years ago, but the industrial and financial logic of re-combining is still strong. Bigger is almost always better when you make metal. And there's a second benefit for Alcoa's management. A deal may help preserve the company's independence.

The company estimates it can cut costs that would be worth about $7 billion to shareholders today. Since the offer for Alcan contains a $4.9 billion premium, the bid as presented pays for itself. But there are two problems. Regulatory approval may be difficult, especially in Canada. The combined company would control a fifth of the world-wide market for aluminum -- twice as much as its largest competitor. Alcoa thinks some disposals may be sufficient, but this could be overly optimistic.

Second, Alcan shares now trade at more than $82 a share, or 12% above the offer. So the initial bid looks too low to win the approval of shareholders. Alcan added $8 billion of market capitalization. That means Alcoa will have to come up with synergies worth $1 billion more or risk burning its shareholders.

That leaves the prospect of another bidder for one or both firms. Asian economic growth means demand should double by 2020. This is creating acquisitive new competitors both in China and Russia. Furthermore, miners like BHP Billiton or Rio Tinto may be interested. Either Alcoa raises its bid -- or Alcan gets away -- and Alcoa risks its own independence to boot.

 False Golden Parachutes

 Compensation arrangements for executives typically provide large payoffs if their company is taken over. These "golden parachutes" often come in the form of severance or accelerated payments of stock grants. These are intended to encourage bosses to consider a buyout offer on its own merits, even if it means losing his or her job. Yet in the current mergers-and-acquisitions wave, many executives are staying put. That means they often get paid twice for the same job -- though they aren't keen to acknowledge this fact.

Take the case of John Wilder, chief of TXU, the utility being bid for by two private-equity firms. In a takeover, Mr. Wilder's contract allows for the accelerated vesting of stock grants. His total payout could amount to $300 million. Yet Mr. Wilder may well stay on at TXU. If so, he would be following in the steps of Harrah's Entertainment boss Gary Loveman, who's receiving around $90 million from the takeover of the casino operator, and continuing to run the place.

Veteran corporate raider Nelson Peltz and his sidekick, Peter May, have come up with an even more ingenious way to collect severance without going very far. Mr. Peltz is receiving $50 million for surrendering his position as chief executive of Triarc, operator of the Arby's fast-food chain. Mr. May is getting $25 million for giving up his role as chief operating officer. However, Mr. Peltz is stepping up to become chairman. And Triarc has entered into a consulting agreement with a company run by the pair, who between them control about a third of Triarc's voting rights.

Messrs. Loveman and Wilder declined to comment.

The provision of golden parachutes to those who don't actually jump isn't simply a question of fairness. It also creates a potential conflict of interest during leveraged buyouts. After receiving huge payoffs from the takeover, managers often retain their old jobs with new, and even more generous, packages. As a result, these arrangements, structured to provide them with incentives to get the best deal for shareholders during takeovers, may have outlived their usefulness.