The Imperfectionists

Chapter 5Imperfectionism

Big Bet on Shiny Metal

In 2007, Tom Albanese was only a few months into his new job as CEO of Rio Tinto, one of the world's oldest and largest mining firms. It was a highly uncertain time—Rio Tinto's largest competitor, BHP, had just launched an unwelcome bid to acquire the company. Rio Tinto rejected it, but Albanese felt intense pressure to make an immediate and significant strategic move. He eyed Canada's premier aluminum business, the Aluminum Company of Canada, known as Alcan. At the time, aluminum prices were about $1.20 per pound, a 35-year high, signaling top-of-market risk. Rio Tinto was heavily dependent on iron ore, and aluminum seemed the right metal for the future: light, corrosion-resistant, and used to manufacture a wide range of products, from cars to airplanes. China appeared to be preparing to enter the global aluminum market too, but Albanese reasoned that Alcan would enjoy a sustained advantage from Canada's low-cost hydro-powered electricity.

What to do? The chairman of Rio Tinto, to whom Albanese reported, was rumored to favor the idea of adding another leg to the company's strategic stool. Albanese decided to go all-in and Rio Tinto launched its bid. Unfortunately, competitors Vale and Alcoa had a similar idea, and soon Rio Tinto was in a dogfight for Alcan—eventually paying 60% more than the pre-merger share price, a whopping $38 billion in cash. Given Rio Tinto's market capitalization of only $90 billion at the time, this amounted ...