Part 1. Based on the article “Alcoa Details Plans to Split Into Two Companies – WSJ” – i attacked in files below.. answer 3 questions below: (each atleast 150words)i. Which market is Alcoa exiting? Why? [That is: What issues are leading to this decision?]ii. Describe any barriers to exit you would expect Alcoa to face.iii. Will this exit be likely to hurt company profits in the short run? In the long run?Part2: Make 2 replies for 2 discussions below (each one atleast 150words).. please provide charts, pictures, sources if necessaryJay:Question 1: What is happening to the demand for US-produced cheese? Why?The demand for US produced cheese is on the rise. According to the latest Livestock, Dairy, and Poultry Outlook, US cheese demand appears to be solid, up 1.4% from June 2017 to 2018 and up 6.2% since May (Mielke, 2018). According to Gee’s article, American’s eat an average of 36 pounds of cheese a year apiece (Gee, 2016). This is spurred by recent declines in the prices of US produced cheeses. As the prices for cheese continue to fall, cheesemakers are trying to soften the blow of declining prices by attempting to sell more. For example, retail prices for cheese were down 4.3% in April 2016. As the demand for milk declines the supply of cheese continues to rise creating a surplus. According to the Department of Agriculture, the US currently has 1.39 billion pounds of cheese in storage (Akhtar, 2018). Extra cheese means lower prices. This increase in supply and unchanging or rising demand will likely result in a lower equilibrium price and a higher equilibrium quantity.ResourcesAkhtar, A. (2018). America has a cheese problem that’s only going to get worse. Retrieved from http://money.com/money/5325694/cheese-excess-trump…Gee, K. (2016). A cheese glut is overtaking America. Retrieved from https://portal.tamucc.edu/articles/1743833.5429/1….Mielke, L. (2018). U.S. cheese demand appears to be solid. Retrieved from https://www.farmersadvance.com/story/money/2018/08…Nikko:2. How would you argue that the producers of cheese (and meat and poultry) are perfectly competitive?A perfect competitive environment is an industry with numerous firms producing similar or identical goods. These environments allow consumers to choose among different companies based primarily on price (Besanko, 2015). Besanko (2015) explains that the perfectly competitive demand curve is a horizontal line (elastic demand function) at the market price since all businesses charge the same price. A perfectly competitive market’s characteristics include many sellers, knowledgeable buyers, costless entry and exit in the market, and perfectly elastic demand curves. The markets of cheese, meats, and poultry are prime examples of perfectly competitive industries since customers can buy these foods at countless local grocery stores in their neighborhoods.Additionally, shoppers are generally knowledgeable about the varieties of cheese, poultry, and meats for a given dinner cuisine. Considering newer farmers are entering these markets daily in a relatively straightforward manner, this is another feature that helps characterize these industries (cheese, poultry, and meat) as relatively perfectly competitive. In perfectly elastic markets, any change in price would utterly eradicate the demand for that product (Besanko, 2015). If the cost of poultry of one company in any one market soared while others remained constant that the firm will see a plummet of demand for its product leading to ultimate exiting of the market, this would be mirrored for cheese and meats. With so many brands, distributors, and farmers available, the average shopper will buy a generic, substitutes, or more affordable alternative proteins or cheeses. If the price of poultry skyrockets then shoppers can substitute their palate with other protein dishes (pork, beef, bison, fish, soy, etc.) and vice versa for meat. If one type of cheese’s price rises higher than customers can afford, people may buy other cheese.Besanko, et al., Economics of Strategy, Wiley, 7th Edition, 2015, ISBN 978-1- 119-17477-6
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on August 29, 2016
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Alcoa Details Plans to Split Into Two Companies – WSJ
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BUSINESS
Alcoa Details Plans to Split Into Two
Companies
Parent company, called Arconic, to focus on aerospace, automotive, transportation, and
building and construction markets
An Alcoa aluminum plant in Alcoa, Tenn. In the company’s split, the mining, refining and smelting operations will
be spun off into a company that would keep the Alcoa name. PHOTO: REUTERS
By JOHN W. MILLER
Updated June 29, 2016 1:01 p.m. ET
Alcoa Inc. detailed plans to break up the aluminum maker after 127 years, a move
aimed at capitalizing on growth in the aerospace sector while insulating its
shareholders from flailing commodity markets.
8/29/2016 2:10 PM
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In a securities filing laying out a split planned for later this year, Alcoa said it
would change its name to Arconic and focus on engineering parts for aerospace
and automotive businesses, and spin off a new company, Alcoa Corp., which will
house the company’s traditional mining, smelting and refining divisions.
Shareholders in the existing Alcoa will receive shares in Arconic, the new parent,
as well as at least 80.1% of the shares in a new, spun-off Alcoa, the company said.
Arconic will hold the remaining stake in the spinoff, but said it plans to sell that
stake, eventually severing its relationship with its main aluminum supplier, and
its exposure to tepid aluminum markets.
Arconic will take on over 85% of the company’s $9 billion in debt, giving Alcoa a
boost as it seeks to survive amid depressed aluminum markets. At the same time,
Arconic’s growth potential and its reduced exposure to the price of raw
aluminum put it in a stronger position to borrow money.
MORE ON ALCOA
Alcoa’s Plan to Split Concern Partner Alumina (http://www.wsj.com/articles/alcoas-plans-to-split-concernpartner-alumina-1464729954)
Alcoa Breakup Might Not Move the Needle (http://blogs.wsj.com/moneybeat/2016/04/12/alcoa-breakupmight-not-move-the-needle/)
Alcoa Results Hurt by Weak Aluminum Prices (http://www.wsj.com/articles/alcoa-hurt-by-weak-aluminumprices-1460408314)
Its profitability and future prospects mean credit markets look at it differently
than if it were still a commodity business with a middling cost position,” says
Andrew Lane, an analyst for Morningstar Inc. Inc.
The split, which includes a non-exclusive supply agreement, also frees up
Arconic to buy more raw aluminum from outside suppliers, and gives it more
flexibility in purchasing. “The Alcoa smelters will be able to sell metal closer to
where they are, and the downstream can buy from anywhere,” says Lloyd
O’Carroll, an analyst for data provider and researcher CRU and an Alcoa
bondholder. “It’s an optimization, and it will save on freight.”
The company didn’t disclose the date for the split. Alcoa’s share price closed
down 2.5% at $9.10 on Wednesday in New York Stock Exchange trading.
Depressed by lower demand and Chinese oversupply, the raw aluminum price on
the London Metal Exchange has fallen to around $1,500 a ton, down from over
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$2,500 a ton five years ago, frustrating Alcoa’s efforts to boost its share price. In
2015, the company reported a net loss of $121 million, compared with a net profit
of $268 million in 2014.
While raw aluminum was in the dumps, the aerospace sector has been hungry for
fasteners and other alloyed parts, setting up the case for a split.
Since 2014, Alcoa has made major acquisitions, including of U.K. jet-engine parts
maker Firth Rixson Ltd. and Pittsburgh-based RTI International Metals Inc.,
and signed around $15 billion worth of supply deals with companies including
Boeing Co., Airbus Group SE and Lockheed Martin Corp.
By 2015, the company was reporting $12.5 billion in revenue for aerospace and
other so-called downstream assets, compared with $11.2 billion in the raw
aluminum divisions.
“Alcoa has the leading technology in the world for aerospace, and they’ve
protected it with patents and supply-chain agreements, and they’re doing
everything possible to protect that,” said Dick Evans, former chief executive of
Alcan, in an interview.
Splits and spinoffs are becoming “increasingly common” as the economy
weakens, said Anil Shivdasani, a professor of finance at the University of North
Carolina. “Companies have limited options to grow their business, so if they can
identify a piece of the business that has greater potential for growth, a split
makes sense.”
It also has risks.
There is still a lawsuit pending with an Australian joint venture partner objecting
to the terms of the split, with a trial date set for September.
The primary metals business could face a harder time raising capital, and
continued headwinds in global metals markets. Since 2007, Alcoa has been
closing high-cost-smelters, including eight of its 10 U.S. smelters.
Instead, Alcoa will make aluminum in places with plentiful energy, where the
power costs of making aluminum are closer to 20%, such as Norway, Iceland,
Canada and Saudi Arabia.
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Spinoffs tend to do well with investors, but they tend to make juicy targets for
acquisition, say analysts. And Arconic’s automotive-sheet business will be
smaller and more vulnerable than aerospace, say industry experts.
Write to John W. Miller at [email protected]
8/29/2016 2:10 PM
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