Melrose in fresh pledges to stop deal being halted
Turnaround firm may agree guarantee over GKN’S aerospace arm to avoid government veto
MELROSE could be forced to make tough new commitments on the future of GKN after the Government threatened to stage a dramatic 11th-hour intervention.
While the ink was still drying on its £8bn takeover of the FTSE 100 engineer, Greg Clark, the Business Secretary, shocked both sides with a promise to look into whether ministers should block it on national security grounds.
The late twist, nearly three months after Melrose first approached GKN, has been condemned by City sources who accused the Government of political posturing in the face of calls to protect its independence.
It leaves Melrose scrambling to make fresh pledges in an attempt to see off the threat of state interference.
It is now understood that the turnaround outfit could agree to a legally binding undertaking that requires it to hold on to GKN’S cherished aerospace arm for a minimum of five years – which would go much further than previous pledges to give the Government a veto on any sale.
The business is involved in some key UK defence projects and Gavin Williamson, the Defence Secretary, is reported to be concerned that it could end up in the hands of a foreign buyer. Mr Clark told MPS this week that he had four months to assess the situation.
However, in an interview with the BBC yesterday, the Business Secretary struggled to make a convincing case for the deal to be halted.
“I can’t give a view until I have all the evidence from the key agencies in front of me, to do so would be to prejudice that quasi-judicial judgment,” he said. Mr Clark even praised Melrose for its earlier commitments on research and development, among other key issues.
He also rejected calls from critics including Liberal Democrat leader Vince Cable and former trade secretary Michael Heseltine to tighten takeover rules. He said: “It is important that we should continue our long-standing tradition of being a place of competition.
“It’s the case that if you’re a public company then you’re constantly under scrutiny by shareholders and by alternative management who say they can do a better job.
“The approach that we have reinforced in our industrial strategy is not to have a protectionist approach, not to pick winners as was done in the past, to subsidise or protect them. It is to ensure that our business environment is one in which there is competition in which no incumbent is immune from the challenge of being kept efficient and strategically focused.”
Despite the backlash, City sources played down the prospect of any referral on national security grounds.
GKN supplies parts for military air- craft such as the A400M transporter plane and the F-35. However, few of the parts that GKN makes are regarded as highly sensitive. It has also been pointed out that Melrose was a British company and GKN had been allowed to sell its helicopter business Westland to Italy’s Finmeccanica in 2004.
If Melrose gets the green light, advisers to the two companies will share a fee jackpot of approximately £250m.
A259-year-old company torn to shreds. Britain’s industrial heritage flogged off to asset strippers. Thousands of honest manufacturing jobs put at risk while the hedge funds make millions. In the wake of Melrose’s victorious £8.1bn hostile raid on engineering conglomerate GKN, the cries of outrage were so predictable they almost wrote themselves. Everyone from Jeremy Corbyn to Michael Heseltine was outraged. Almost immediately the Government, which increasingly has a paper-thin commitment to traditional free-market conservatism, said it would review the deal and may still block it.
And yet that would be the worst possible response. Melrose won the battle fair and square. While jobs may be lost, that is only because the new managers are good at running businesses more efficiently. Blocking a bid on spurious national security grounds would send out the worst possible signal about the kind of post-brexit economy Britain wants to create: it would look insular, statist and protectionist.
In truth, the FTSE has plenty of old giants that have lost their energy and purpose. We should encourage a few more Melroses, not punish them.
There isn’t much that unites Corbyn and the Daily Mail. But they both seem to agree that Melrose’s takeover of GKN is a very bad thing. The Labour leader condemned “asset strippers”, citing a Mail headline on “an abuse of capitalism” to support his argument.
Heseltine complained that no other country would allow an industrial treasure like GKN to be swallowed up by a raider. In response, Business Secretary Greg Clark promised to review it on national security grounds.
Could it be blocked? The Government has limited powers to interfere in takeovers, but GKN does enough defence work that national security could plausibly be used.
From energy prices to minimum wages, Theresa May’s Conservative Party has shown it has minimal interest in free markets. A paternalistic, statist version of capitalism has its attractions for a certain kind of Tory, and blocking this takeover would be the perfect statement of that. And yet it would also be a huge mistake – for two reasons.
First, it would send out precisely the wrong message about the sort of economy we want to create. The specific objections to the takeover are completely ridiculous. There is little debt involved, so shareholders were essentially choosing between two management teams. There is no reason to imagine anyone from Melrose will be on the phone to Vladimir Putin over the bank holiday inviting him to buy any tech secrets that might be buried within GKN. Sure, jobs will probably be lost, but only because the Melrose team believe there is room for improving efficiency. National security would simply be an excuse for old-fashioned protectionism.
In truth, if we want a protectionist, state-dominated industrial economy, it is probably not a great idea to leave the EU. As we leave, however, we need to concentrate on remaining open, competitive, innovative and dynamic. A sudden lurch towards industrial intervention would hardly convince anyone we planned to be those things.
Next, we need more Melroses, not fewer. In the last two decades, the hostile raid has become about as fashionable as shoulder pads. And yet, it may well be overdue a revival. Take a look at the FTSE 100 and there are plenty of giants that look hopelessly tired and confused. Such as? Glaxosmithkline has been going nowhere for years. Sir Martin Sorrell looks increasingly past his sell-by date, and his WPP empire may well be better broken up. IAG has allowed the British Airways brand to go into miserable decline. Run down the list and there are lots of huge businesses that need new ideas and fresh energy.
In a free market, the threat of a hostile takeover is the ultimate sanction. Sure, it is great when companies reinvent themselves. And if that doesn’t happen, it is even better when the shareholders get together to push through a change of management. In the real world, it doesn’t always happen like that. A hostile raid is often the only way to revive a tired business. Block Melrose? Forget it. We should be encouraging a few more raiders to get to work on British business.
‘In a free market, the threat of a hostile takeover is the ultimate sanction’