Alcoa (NYSE:AA) is one of the world's most important aluminum producers. But right now aluminum really isn't the big story. Instead, shareholders are watching the corporate breakup that the relatively new CEO is pushing for. In fact, this type of event is one good reason you should care about the chief executive of a company -- and history is the best guide for why.
What's going on?
Here's the setup. Alcoa hires Klaus Kleinfeld in 2007 as its president and chief operating officer, and within seven months he's promoted to the CEO spot. He starts moving the company away from commodity aluminum markets and toward niche aluminum products, where the company can add value and charge higher prices. In mid-2014, Alcoa agrees to pay nearly $3 billion to buy an aerospace specialist called Firth Rixon, materially increasing the size of its specialty businesses.
Then, in the third quarter of 2015, Kleinfeld announces that Alcoa will split into two companies. One will focus on the specialty products business he's been expanding. The other will own the legacy commodity aluminum business that he's been shrinking. In case you didn't figure it out, he's going to run the specialty-products business.
The first question to ask is whether this is a good or bad move for shareholders. Although that's hard to tell at this point, at the very least investors will be able to decide which part of the business they want to own. So choice is good. However, another question is whether this is good for the CEO. Clearly, he likes the specialty side of the business and has managed to put himself in a position to prosper along with the segment of Alcoa on which he's been most focused.
Wait one moment ...
A cynical mind might suggest that's a little self-serving. And perhaps it is, but there are some interesting precedents that you might want to look at before you follow along with Kleinfeld and dump "old" Alcoa.
Take, for example, the split-up of Kraft Food into Kraft and Mondelez International (NASDAQ:MDLZ). Kraft retained the slow-growth U.S. food portfolio and Mondelez got the supposedly higher-growth international and snack businesses. This, of course, happened after a relatively new CEO bought a large internationally focused competitor, Cadbury. The CEO went with Mondelez.
But it hasn't worked out as well as planned. The higher-growth business stalled, failing to live up to expectations. The top line fell last year and looks likely to do so again this year. Kraft, meanwhile, wound up merging with Heinz to create Kraft Heinz Co. (NASDAQ:KHC), in a transaction helped along by Warren Buffett. So it's hard to do a compare and contrast, but suffice it to say Mondelez's growth didn't turn out to be as robust as investors may have hoped. And catching the interest of Buffett is kind of a statement in and of itself about the opportunities embedded in Kraft.
Another example, where an apples-to-apples stock price comparison is available, is Altria (NYSE:MO). This cigarette maker split its tobacco business up into the slow-growth U.S. business, which Altria was keeping, and its higher-growth foreign businesses, which would take the name Philip Morris International (NYSE:PM). The CEO at the time of the split went along with Philip Morris International to test the global appetite for smokes.
At first, Philip Morris' stock did outperform the slower-growth Altria, but then something interesting happened. The problems that made the U.S. tobacco business undesirable started to pop up more and more around the world, and Philip Morris' stock plateaued. Altria's shares, meanwhile, have kept chugging along and, at this point, anyway, have proved the better investment. Once again, it looks like a CEO was the architect of a corporate split that didn't pan out as planned.
Will Alcoa's split follow the same path as Kraft/Mondelez and Altria/Philip Morris International? There's really no way to tell in advance. However, these two examples provide a cautionary tale for investors who might be enamored of the higher-growth businesses being split off by the CEO. These big moves don't always play out as planned, and sometimes, slow and steady is the better business to hold.