Summary

The Arconic-Alcoa split favors Arconic disproportionately, as the former would be rated investment grade and the latter could have BBB- rating.

The split is based on the rationale that management's focus on the upstream and the downstream businesses are quite different qualitatively and therefore incompatible.

Arconic is poised to take advantage of the disruptive growth in automotive where it still holds the No. 2 position, while on all its other businesses it holds the No. 1 position.

Arconic, the newly created entity, will be splitting from Alcoa (NYSE:AA) to form the holding company of all downstream assets of Alcoa. The "arc" of progress, coupled with the "iconic" products in aluminum that Alcoa has been so famous for, led to the framing of the name Arconic.

The split of upstream and downstream assets in the case of Alcoa comes after almost twelve years of the Novelis-Alcan split. But the rationale now could be quite different.

Metal businesses, whether in steel or aluminum, have two distinct business models. One is the integrated model, like erstwhile Alcoa, and secondly, we have the disintegrated model (separate upstream and downstream). Both these models have pros and cons, but the business cycles have influenced the outcomes more than what the models stand for.

The rationale of an integrated model is that while upstream businesses could be very volatile in terms of cash flows or margins due to vagaries of international prices, the downstream provides the stability throughout the upturns and downturns with a pass-through model. On the other hand, the high margins during the upturn of business cycles make the allowance for asset heavy upstream to survive the onslaught of a downturn and stand on its own feet; essentially, the cushion effect of the downstream is largely misplaced.

The Arconic-Alcoa split is a breakaway from the integrated model that Alcoa espoused for more than hundred years of its existence, and it has some solid arguments to go for it now. But I am of the view that the split leaves Arconic on a stronger wicket than Alcoa.

• [Editor:tianyawei]