If GKN is taken over, Britain may as well forget being a major engineering nation

( Not that rapacious hedge funds would give a damn )

NO TAKEOVER has excited such passion in recent times as the £8 billion swoop by asset-strippers Melrose for GKN, a venerated British engineering firm whose heritage dates back to the Napoleonic wars.

The fight for control of a company that employs 58,000 people across 30 countries reaches a climax this Thursday. Among those opposed to the takeover — including this newspaper — there are rising fears that the super-rich who run Melrose have entered into an unholy alliance with a gang of unsavoury, sharp- suited hedge fund bosses whose only apparent loyalty is to enriching themselves.

What I find deeply disturbing is the insouciance of the Government, and in particular Business Secretary Greg Clark, about the prospect of one of Britain’s research and development powerhouses succumbing to Melrose ownership.

Tragedy

GKN has a record of spending up to a decade developing new technologies. It has worked on Airbus wings, for example, and precision fans for Rolls-Royce turbine aerospace engines. Some 12,000 jobs at Airbus in North Wales are dependent on its supply of parts and know-how.

In sharp contrast, Melrose bosses boast of their ability to slice and dice companies and sell them off to the highest bidder within two to five years. The tragedy is that, if the takeover goes ahead, engineering skills built up over generations at GKN’s Redditch base in the heart of the Midlands could be lost — on the eve of Brexit, when British engineering should be one of the jewels in our industrial crown.

Sadly, we shouldn’t be that surprised at the neglect shown by the Department for Business, energy and Industrial Strategy. In spite of Theresa May’s pledge to look after Britain’s most strategic companies, Greg Clark and his colleagues have been largely hopeless. Clark signed off the sale of the British firm Vauxhall to the French giant Peugeot last year, and now we find that hundreds of jobs at ellesmere Port, one of the most efficient car plants in europe, are to be lost. Meanwhile, the department did nothing to prevent new contracts being granted to construction group Carillion in the months before its collapse earlier this year.

And it allowed Britain’s biggest gas storage facility, at Rough off the Yorkshire coast, to shut down last year — meaning the freezing ‘Beast from the east’ brought the nation perilously close to black-outs last month.

In spite of GKN’s huge strategic importance to Britain’s leadership in aerospace — and as a key supplier to the Pentagon of the F-35 Lockheed Martin fighter (destined for the UK’s new aircraft carrier fleet) — Greg Clark has maintained a handsoff approach. Only brash Defence Secretary Gavin Williamson has made the case for intervention on grounds of national security — and has been largely ignored.

But what’s really shocking is the way in which Britain’s free and open capital markets are apparently so vulnerable to the machinations of hedge funds and short- term investors seeking fast profits at the expense of the nation’s future.

eight years ago the then chairman of Cadbury, Sir Roger Carr, launched a fusillade of criticism against hedge funds as the nation’s emblematic chocolate company was subjected to a hostile takeover by Kraft. Carr told me he had no choice but to surrender because in the final days of the bid, hedge funds started buying up large numbers of shares in search of a quick killing.

Carr was so incensed that he made a proposal that only investors who’d owned shares in public companies for more than six months should be allowed a vote on the fate of those firms.

Now, the scenario could be playing out again. As the Mail reported yesterday, the ruthless U.S.-controlled hedge fund elliott Advisors has led the way, building a 3.4 per cent stake in GKN with the aim, it is suspected, of selling the shares at higher prices if the takeover goes through.

Rather than admit it was out for a quick profit, it launched a fearsome attack, claiming GKN has ‘incompetent’ management. GKN has had trouble following a profits warning last year and musical chairs on the board. But to be lectured by the likes of elliott — whose parent company is one of the most ruthless and unprincipled investment firms on the planet — is beyond the pale.

We should, however, expect a more responsible attitude from long-term, UK-based firms who have invested the savings and pensions of millions of ordinary British citizens in GKN.

Aviva Investors, the fund management arm of the big UK insurer Aviva, shocked the financial community when it said it would sell a 3.1 per cent GKN stake to Melrose.

What’s most astonishing is that the Aviva decision was announced by David Cumming who, in his previous job at Standard Life, was one of the most outspoken supporters of better governance in Britain’s boardrooms. His decision raised eyebrows, although it’s his view that the takeover would benefit shareholders in both firms.

Rapid

The truth is that, irrespective of Melrose’s past successes in making short-order profits for investors, it doesn’t appear to have any rigorous governance to speak of.

It has an executive chairman in Christopher Miller, an executive vice- chairman in David Roper (a big Tory Party donor) and chief executive Simon Peckham, who seem to run the group as if it were a medieval fiefdom. Together they’ve extracted vast sums of money, becoming fabulously rich without any constraints imposed by the board or outside investors.

Over less than a decade, the trio — plus finance director Geoffrey Martin — have cumulatively acquired £457 million in pay, bonuses, incentive shares and share purchases. If the hedge funds and long-term investors such as Aviva allow Melrose to take control of GKN, these bosses could earn a further £285 million.

The Melrose three’s interest in rapid gains rather than longterm investment was demonstrated when they appeared before the Business Select Committee chaired by Bank of england economist turned Labour MP Rachel Reeves. Asked to make formal commitments to future research and development, and the pension funds at GKN, they initially declined to do so.

Smashed

Under pressure for clarity from GKN and its advisers, they eventually came up with pledges. But how enforceable they would be if GKN is smashed into several parts and sold off is open to question.

A huge responsibility rests with GKN’s biggest long-term investors, led by BlackRock (with a 5.07 per cent stake) whose advisers include former Chancellor George Osborne. earlier this year, BlackRock boss Larry Fink, the most powerful fund manager in the world, wrote to chief executives of firms in which it is invested, laying out a strategy of engaging with companies ‘to drive the sustainable, longterm growth our clients need to meet their goals’.

Now, Fink and BlackRock have a chance to demonstrate their belief in long-term excellence by voting to give GKN chief executive Anne Stevens and her team a second chance. If not, the hedge funds that have built up a 25 per cent stake in GKN will hold sway.

It has become fashionable among some commentators to back Melrose. But as the final judgment over the future of GKN looms, major investors must decide whether Melrose — a company one-fifth the size of its target, with questionable governance and a mixed record of management — is to be trusted with an asset critical to the UK’s future in aerospace, defence and electric technology for cars.

The answer to this bid should be a resounding no — otherwise the UK might as well give up its claims to be a great engineering nation, not that rapacious hedge funds would care a damn about that.