Melrose was ready for action; takeover target GKN wasn’t

On day one of Melrose’s bid for GKN in January, everybody in the City knew one thing. GKN, a 259-year old company that made cannonballs for Waterloo and Spitfires in the second world war, was doomed if its management mounted a defence based on its recent financial record.

GKN had disappointed its shareholders too often and three months previously had confessed to discovering a pile of overvalued stock in its US aerospace division. Credibility was low and GKN was up against a takeover specialist with a big City fanclub and a keen sense of when to pounce. As Melrose’s chairman, Christopher “Jock” Miller, volunteered, his firm had been watching GKN for years. The bidder was ready for action; the target wasn’t.

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Miller and his two Melrose co-founders, who shared a £120m bonus pot last year from the proceeds of past deals, could wave a financial CV with an eye-catching boast: a pound invested in their company at launch in 2003 is now worth £18. The firm’s turnaround techniques have been condemned by the Unite union and some MPs as ugly asset-stripping – a charge Melrose fiercely rejects – but City fund managers have largely ignored that debate, as GKN knew they would.

Q&A

What is GKN?

GKN is a global engineering business based in Redditch, Worcestershire. It employs nearly 60,000 people across 30 countries.

Once known as Guest, Keen and Nettlefolds, the firm can trace its origins back to 1759 and the birth of the Industrial Revolution in Britain.

Split into three key divisions – GKN Aerospace, GKN Driveline and GKN Powder Metallurgy – the multinational designs, manufactures and services systems and components for most of the world’s leading aircraft, vehicle and machinery makers.

In 2017 it recorded pre-tax profits of £572m.

Photograph: David Davies/PA

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GKN, therefore, proposed its own version of a breakup – probably the only strategy that stood a chance of making the contest close. The central plank was a sale of the Driveline automotive division, which makes parts and shafts for 90% of the world’s car manufacturers. GKN would instead concentrate on aerospace, the business with the best long-term prospects and a strong order book for US military work. Shareholders would collect £2.5bn in cash, GKN’s pension funds would get a cut of the proceeds and investors, if they wished, could hitch a ride with Dana, the US group unveiled as the new partner for Driveline.

It didn’t work. The takeover scrap has been a classic to rival Granada-Forte in 1995 and Kraft-Cadbury in 2009 but, as with those contests, the bidder won. Why did GKN lose? At least four reasons.

First, GKN’s credibility hole was deep. The £112m inventory cock-up in the US meant its chief executive-in-waiting was ousted before he’d even started the job – he’d been in charge of the unit. Anne Stevens, already a non-executive director of GKN and a former Ford executive, was a credible replacement and has impressed. But she was still a new face. Some GKN shareholders sold their shares before they’d even heard the case for independence.

Second, Melrose’s investors were gung-ho for the deal. The big risk, from the bidder’s point of view, was that its own investors would think a £8bn reverse takeover, mostly in the form of shares, was too much to handle. Melrose gave astonishingly few details about how GKN will be managed, beyond clearing out the current board and hoping to boost profit margins, but its fans didn’t mind. They probably judged – with justification – that the takeover price was good.

Third, GKN’s breakup strategy looked a little too panicked. The deal with Dana didn’t convince everybody, however many times Stevens and GKN’s chairman, Michael Turner, declared that the plan was hatched before Melrose turned up. Selling Driveline and the smaller powder metallurgy division made it harder for Stevens to rage convincingly against Melrose’s “short-term capitalism”. GKN itself was turning somersaults.

Fourth, the political heat never reaching boiling point. The business secretary Greg Clark’s intervention came late in the day – on day 54 of 57-day contest – and was weak. It merely obliged Melrose to drape itself in a union flag by promising to keep a UK head office and a listing on the London Stock Exchange, retain the GKN brands and commit to a minimum level of spending on research and development. The buyer would probably have done all those things anyway. It went one better, saying it would give ministers a veto on any sale of GKN Aerospace for five years.

Why didn’t the government do more? In the end, Clark seems to have decided that bending the takeover rules was a step too far. GKN is a relatively small supplier to the Ministry of Defence; only 6,000 of its 59,000 GKN employees are in the UK; and Melrose is a UK company. A formal intervention on grounds of national security is still theoretically possible but highly unlikely. One part of GKN, most likely the aerospace business, could one day re-emerge as a quoted company when Melrose turns seller. But breakup beckons.