Give credit where it is due - Allegheny Technologies (NYSE:ATI) is not messing around when it comes to its plans to diversify away from stainless steel products and become a more diversified player in advanced alloys and technologically sophisticated components. The latest move is the acquisition of Ladish (Nasdaq:LDSH), a small company that has focused on forged and cast-metal components for the aerospace and defense industry.

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The Deal
Allegheny is paying a total consideration of $48 per share to Ladish, consisting of $24 per share in cash and slightly less than 0.46 shares of stock for each share of Ladish. That is a total deal value of about $778 million (prior to the post-announcement moves in the stocks) or slightly more than 14 times Ladish's trailing EBITDA. For Ladish shareholders, it also represents more than a 63% premium to the prior night's closing price, but a roughly 17% discount to the company's all-time high back in mid-October of 2007.

What Allegheny Gets From This
Allegheny is already a leader in titanium and nickel-based alloys used in various aerospace components, a market they share in part with RTI International Metals (NYSE:RTI), Titanium Metals (NYSE:TIE) and Russia's VSMPO-Avisma. Allegheny also manufactures more exotic alloys for use in fields like nuclear power. Interestingly, while Allegheny is often talked about as a company with heavy aerospace dependence, the company also gets a substantial amount of business from sectors like energy, petrochemicals and autos.

That said, this deal will make Allegheny even more of what people already think it is - a company highly levered to the aerospace and defense sector. Ladish's forged/cast components are designed primarily for the rigors and demands of aerospace, and the company gets about half of its business from United Technologies (NYSE:UTX), General Electric (NYSE:GE) and Rolls Royce - all of which are major suppliers to companies like Boeing (NYSE:BA), Airbus, Lockheed Martin (NYSE:LMT) and Raytheon (NYSE:RTN).

Where to From Here
These are not the best of times for Allegheny. The company preannounced a big third-quarter miss and analysts chopped down their estimates for 2010 and 2011. Some of this is due to ongoing delays at major aerospace companies like Boeing, but is not as though there is rampant demand in energy, petrochemicals and other sectors these days (though order activity is picking up).

In fact, this may be one of those opportunities to buy a good (if cyclical) company before the boom times return. True, the company's stock has already more than doubled from its lows in late 2008 and early 2009 (creating a nice little double-bottom), but has recently stagnated. Of course there is always further downside risk (the global economy could take another swing down), but Allegheny has quite a bit more peak earnings potential than is currently visible or in the stock. (For more, see Cyclical Versus Non-Cyclical Stocks.)

The Bottom Line
This is not really a good candidate for a buy-and-hold portfolio, but investors looking for a metals play with longer legs than copper or iron ore, Allegheny may be an intriguing idea. What's more, as the company continues to expand into more value-added market segments, perhaps some of that volatility will ease in the future. (For more, see The Characteristics Of A Successful Company.)

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Tickers in this Article: ATI, LDSH, GE, UTX, BA, RTI, TIE

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