Blow to GKN as US ‘vultures’ back takeover
THE future of British engineering stalwart GKN hung in the balance last night after an aggressive New York hedge fund backed an £8.1billion hostile takeover.
Investment firm Elliott, which controls a 3.4 per cent stake in GKN, yesterday threw its weight behind turnaround specialist Melrose in the battle for control of the manufacturer.
Opponents of the takeover warn that Melrose is simply trying to strip the 259-year-old firm’s assets so directors can secure a £285million bonus.
Elliott has been dubbed a vulture fund by critics over its aggressive tactics. It has been building its stake in GKN ever since Melrose launched its bid – a strategy that will enable it to make a quick buck should the takeover go ahead.
It came as two major car manufacturers, which account for £800million of GKN’s sales, voiced opposition. In an indication of rising concern that its opportunity is slipping away, Melrose issued a last desperate plea for support.
Major GKN shareholders including Lancaster Investment Management, Jupiter Asset Management and Columbia Threadneedle have come out in defence of the engineering firm. Airbus – its single biggest customer – has warned it will be ‘practically impossible’ to work with the firm if Melrose buys it.
GKN says it will sell its partsmaking arm Driveline to US supplier Dana if it can fight off Melrose. Dana is set to list its shares on the London Stock Exchange if this £4.2billion deal goes ahead, giving British investors more control.
A senior executive at one top European carmaker said: ‘We are much more comfortable with a long- term, wellrespected industry investor like Dana than someone with a private equity-style buy-and-sell approach whose shortterm outlook will influence our purchasing decisions.’
ADS, the aerospace and defence industry trade body, called for the deal to be blocked on national security grounds.
Shareholders who own more than half of GKN’s stock must give their backing to the deal by the end of Thursday next week if it is to go ahead.
Melrose chairman Christopher Miller wrote to GKN investors yesterday in a final effort to get them onside.
He said: ‘Only the Melrose team can transform GKN into the manufacturing powerhouse that it could and should be.’ Elliott argued that GKN’s ‘recurring historical underperformance was self-inflicted’.
The hedge fund was famously branded a ‘financial terrorist’ for buying up Argentine government debt while the country’s economy collapsed, then demanding payment in full.
Other victims include investment manager Alliance Trust, whose chairman and chief executive were forced out after a vicious public campaign.
Melrose is still waiting for permission from US authorities for the deal. It now says it will push on even if their April 17 deadline is missed.
THE outcome of hostile bids is rarely good, as Kraft-Cadbury reminds us. But they do show how Anglo-Saxon capitalism can unlock value for investors.
The £8bn offer by financial engineer Melrose for real engineer GKN has exposed serious flaws in both enterprises, which ought to lead to better outcomes for whoever wins the tussle. The lesson for Melrose is that its ‘rose garden’ strategy, which relies on its City claque, such as Aviva Investors, to deliver support with no questions asked, is defunct. The proposed deal has exposed how out of touch the Melrose three – Chris Miller, Simon Peckham and David Roper – are with governance standards.
If Melrose proves as ruthless at running GKN as it claims, top executives could potentially walk off with a swag bag filled with £285m in pay, bonuses and shares. Such greed is simply unacceptable in the context of a public company and can only expose the financial community to opprobrium.
As importantly, the Melrose three have also learned that half-promises of looking after pensioners, maintaining R&D budgets and caring for the workforce no longer suffice. If Melrose does succeed it will have to fulfil its promise of inserting up to £1bn into the pension funds, securing R&D budgets and engaging continuously with key customers such as Airbus. Failure to do so will lead to legal remedies, and, in the case of Airbus, the loss of a customer responsible for more than 20pc of aerospace sales.
Melrose is likely to find that big car makers, including Toyota, Ford and Volvo, are likely to review their options for suppliers, should it slice and dice GKN.
The Melrose three will need to spend less time skiing and on the golf course, put their shoulders to the wheel and work harder and more long-term if they are to unlock the ‘GKN potential’, as Miller promises.
There are also grave questions as to whether the Pentagon could ever be satisfied with short-term ownership of US defence contracting. As for GKN, it can no longer live on historic laurels of cannonballs for the Napoleonic Wars or Spitfires in the Second World War.
After a couple of recent profit warnings, musical chairs at board level and suboctane returns, it needed to be shaken up.
Melrose wakened the board from slumber. Hurried responses to past under-performance include Project Boost, which seeks to sharpen up profit margins and splitting into two main divisions, and selling off powder metallurgy. The putative merger of driveline technology with Dana of Ohio (leaving GKN investors with a 47pc stake in the new company) may never have happened without the intervention of a buyer.
GKN does have a strong culture. At Redditch it sits at the heart of the Midlands and supports a UK supply chain. Its investment in aerospace R&D and the edrive for electric cars is testimony to its commitment to long-term returns for investors.
It is just the kind of cutting-edge engineer the UK needs post-Brexit. Shareholders must put their faith in boss Anne Stevens. They should reject the Melrose bid and count on GKN to deliver a refreshed group punching at its weight as an aerospace champion.
Digital dictators
MUCH has been made this week of humiliation for Facebook and the tardiness of Mark Zuckerberg and his minions in descending from their glass towers to explain missteps to the masses.
The ability of Silicon Valley giants Facebook, Snap, Google and now Dropbox to do so is down to the cravenness of the New York Stock Exchange and Nasdaq.
It allowed these behemoths to float on public markets with a dual shareholding structure which isolates their teenage founders from direct retribution by the thousands of disenfranchised institutional shareholders and activists who can force accountability and change.
No wonder Zuckerberg et al feel able to rule over their fiefdoms like medieval princes.
Listening project
THERE is no such luxury at the insurance giant Aviva or pharmaceutical group Glaxosmithkline.
At Aviva, chief executive Mark Wilson listened to investors and killed a proposal to buy back long-held irredeemable preference shares at par, depriving holders of generous yields.
Meanwhile, after intense speculation and shareholder concern about overpaying and loading up with debt, GSK has (at least temporarily) removed itself from bidding for Pfizer’s healthcare arm.
Investors can make the difference.