Alcoa Makes Hostile Offer for Alcan

America’s big aluminum company Alcoa has made a hostile bid for Canada’s biggest aluminum company Alcan valued at US$33 billion. The resulting company would be the world’s biggest producer of the 13th element on the periodic table, with $54 billion in revenues, 188,000 workers and a production capacity of 7.8 million tons a year. For two years, the two companies have tried various ways to work closer, including merger talks, but Alcoa finally lost its patience. Interestingly, it is Canadian law that makes Alcan such an attractive target.

In an attempt to get Canadian firms to invest more in Canada, the federal government’s new budget eliminates the deduction for borrowing done to invest outside the Dominion. That sounds like a prudent step, but as with most good legislative ideas, the law of unintended consequences arises. For a company like Alcan, with global operations, it merely drives up the cost of keeping Canadian operations afloat.

Alcan’s Chief Executive Officer Dick Evans said in an interview after the company's annual general meeting in its hometown of Montreal, “We have to invest overseas to have an efficient supply chain. By penalizing us by investing overseas, that also penalizes our Canadian operations, making them less profitable and spending less taxes in Canada.”

For example, the Globe and Mail reports that “Alcan’s largest capital investment recently has been the $2.3-billion expansion of its Gove bauxite refinery in Australia, which will provide alumina to smelters in Canada and elsewhere that will be processed into aluminum.” It will be unable to compete, in future, with producers from the US, Britain, France and Russia where such deductibility remains.

As a result, Alcan would be $200-$250 million better off in future if it weren’t subject to this restriction. Lawyers familiar with the circumstances say that if Alcoa succeeds in buying Alcan, its tax situation would improve. That is a very odd way of keeping a Canadian company invested in the Canadian economy – by making it American.

© Copyright 2007 by The Kensington Review, Jeff Myhre, PhD, Editor. No part of this publication may be reproduced without written consent. Produced using Fedora Linux.

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