Add to all the news about Alcoa (AA) buying rival aluminum company Alcan (AL) the rumor that Australian metals giant BHP Billiton (BHP) may buy Alcoa.
BHP could probably afford the deal, It has a market cap of $174 billion compared to Alcoa’s $36 billion. And, on the face of it, combining two big metal companies should save money in overlapping production and management costs.
But, think again. Merger talk and rising aluminum prices have taken Alcoa’s stock up well over 40% during that last year. And, the price of the commodity cannot go up forever. The "merger premium" based on cost savings, is probably priced into the stock. Any glitch in putting the two companies together is bound to hurt the share price of the combined entity.
BHP’s stock is up, too. Over the last twelve months it has added about 50%. So, the currency it would have to pay for Alcoa is worth more. But, the getting the US company would almost certainly require paying a premium, and all of the benefits are already priced in.
Douglas A. McIntyre can be reached at [email protected]. He does not own securities in companies that he writes about.
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