Anne Stevens, the chief executive of GKN, did not have to retract all her weekend statements. One that stands – and is obviously correct – is that hedge funds “could not give a crap” about the engineering firm’s future. Their only interest in Melrose’s £7.9bn hostile bid lies in making money for themselves.
Hedge funds, mostly merger arbitrage funds, are estimated to control 20%-25% of GKN’s shares, either directly or though derivative contracts. The size of that collective holding is the reason why Melrose enters the last lap of this contest as favourite to win. New York-based Elliott Capital is voting its 3.8% holding in support of the bid and most of its co-travellers are likely to do the same.
If Melrose does indeed succeed on Thursday, does that mean vultures such as Elliott will have dictated the outcome? Sorry, but that narrative is too simple. These avian creatures cannot conjure GKN shares out of nothing. They have to buy, or borrow, stock from somebody. The better question is: who created the speculative opportunity?
GKN retracts claims of shareholder support against Melrose bid
In many cases, the sellers will be conventional long-only funds – the same people who happily sign warm and worthy charters declaring themselves to be responsible stewards of capital. Stevens should have taken a pop at them. Some will have flogged the holdings without even waiting to hear GKN’s full defence. Most will not have bothered to ask the ultimate holders, including pension schemes and private investors, which way they’d like their investments to be voted.
A popular cry in these situations is to disqualify short-term shareholders from voting on takeover bids. High-profile industrialist Sir John Parker endorsed the idea in the Sunday Times at the weekend, just as Sir Roger Carr, chairman of Cadbury when it fell to Kraft in 2010, did in the past.
It’s a nice thought, but there is an obvious flaw. If up to a quarter of GKN’s supposedly core investors have seized the opportunity to flog their holdings in the market for a quick turn, expecting them to be loyal at the end of a two-month takeover campaign is wishful thinking. The ultimate outcome, in all likelihood, would be exactly the same. Disenfranchisement would also extinguish those few occasions (the London Stock Exchange, under siege from Nasdaq in 2006, for example) when hedge funds have been critical in defeating a bid.
So, while it’s easy and tempting to rage at hedge funds, it’s futile. Short-termism in the investment industry runs deeper. The only serious way to reform the UK’s free-and-easy approach to takeover bids is to extend the national interest test to cover industrial policy.
Melrose might be a problematic case since it is a UK quoted company with mostly UK shareholders. But a proper study of the two sides’ competing break-up visions for GKN would have been in order. The consequences for the automotive and aerospace supply chains, in terms of jobs and investment, could be significant – under both companies’ plans. Government ministers, we can conclude, are the other people who don’t give a damn, which is more alarming.
GKN’s Dana deal shows it is undervalued
As for the takeover tussle itself, GKN produced a neat 11th hour twist: it persuaded Dana of the US, the planned buyer of its automotive division, to offer another $140m (£100m) in cash. The sweetener is minor in the context of the size of the transaction – but it all helps.
The US firm’s share price had fallen since the terms were announced earlier this month, reducing the value of the 47% stake in Dana that GKN investors could collect. The dollar had also slipped against sterling since Donald Trump’s trade war antics. The $140m tickle in effect almost restores the original terms.
In itself, that won’t sway many undecided voters. But GKN’s pledge to return “up to” £700m in cash to its shareholders “as soon as practicable” after the completion of the Dana deal might get noticed. It suggests the spoils from the overall £2.5bn cash-return programme might come sooner than thought.
The final stages of contested takeover bids are often about bribing shareholders with their own cash, which investment bankers like to dress up as providing “certainty”. You can’t blame GKN for giving it a go. It’s the right tactic when the clock is ticking.
Analysts at Jefferies reckon the sum of GKN’s parts, after all the post-Dana pension transfers, equates to 487p a share, a figure worth noting. The view here remains the same: regardless of the public-interest angle, bidders should pay proper takeover premiums. Melrose, with a mostly-shares offer worth 455p, would be getting GKN on the cheap.