Unprotected GKN left to brave the cold corporate winds alone

It is a company that dates back to Britain’s industrial revolution: an ironworks in south Wales that started in 1759 and supplied the tracks for Brunel’s Great Western Railway. It has become, as GKN, a global engineering giant supplying car and aerospace parts, employing 60,000 around the world and 6,000 in the UK. But now corporate raiders loom in the form of a controversial £7.8bn hostile bid – in which Theresa May’s government has been sidelined, despite its aspiration to develop a new UK industrial strategy.

Bidder Melrose has set a deadline of 1pm on Thursday for GKN shareholders to accept or reject its largely paper-based bid. Insiders describe the situation as finely balanced. Melrose, which is about the fifth of the size, says GKN has lost its way, repeatedly missing profit targets; it says its approach of buying underperforming businesses, restructuring them and selling them on in three to five years will generate far more value. As of Friday, just under 10% of GKN shareholders were backing the Melrose bid, broadly in line with the 9% support for the GKN board.

GKN, which earned £658m last year on sales of £9.7bn, says that Melrose has not offered enough with a bid worth approximately 457p against a GKN share price of 428p. GKN proposes its own restructuring, merging its West Midlands car parts business with US group Dana. GKN warns that jobs around the UK will be at risk, from its headquarters in Redditch through to its aerospace components operations in and around Bristol.

Meanwhile, a string of politicians, from both the Conservative and Labour parties, as well as trade union Unite, accuse Melrose of operating a short-term model that will damage Britain’s industrial base. They would like Greg Clark, the business secretary, to intervene. But few observers believe he has the legal power to do so. Len McCluskey, Unite’s general secretary, said: “Our takeover law is simply inadequate when it comes to protecting British businesses. What happens in this country would not be allowed to happen in France, Holland or Germany.”

Melrose critics say the company has a poor record as a long-term owner of businesses, when it has been unable to sell them on. They point to Brush, a supplier of generators to the oil and gas industry based in Loughborough, which Melrose has owned since 2008. Last month Melrose said 270 UK jobs were at risk at a firm that employs 790 in the country. It said that Brush was the victim of an industry-wide downturn, but GKN supporters argue that a long-term investment strategy might have seen Brush invest in an attempt to diversify into the more promising area of renewables. “Last year GKN spent £262m on R&D; Melrose spent £223m over five years,” said one source close to the company.

Meanwhile Airbus, GKN’s most important customer, has warned that it expects whoever wins the takeover battle to continue to invest in R&D. Earlier this month, it warned against a short-term ownership approach. Tom Williams, the chief operating officer of Airbus’s commercial aircraft division, said: “It would be practically impossible for us to give any new work to GKN under such an ownership model when we don’t know who will be the long-term investor.”

Professor Chris Carr from Edinburgh University, who once worked at GKN, said: “If you look at this company, these industries operate on 50-year perspectives.”

Melrose is run by a group of executives, led by executive chairman Christopher Miller, who are among the best-paid public company bosses in the UK. Last year Miller and three other top executives shared in a bonus payout of £160m worth of shares, after a five-year incentive plan paid out. A previous plan matured in 2012, paying £126m in shares, largely to the same top executives.

Earlier this month Simon Peckham, Melrose’s chief executive, defended the pay of the company’s bosses in front of MPs on the business committee: “I appreciate that this is a difficult subject, but let me put the other side of the equation, which is that, other than to pay those tax levies we have just talked about, in the 15 years I have worked for Melrose, I have never sold a single share in it.” A Unite official, Steve Turner, also giving evidence, said Melrose bosses had “trousered over £400m” in the past decade, during which time GKN has invested £500m in UK manufacturing.

Competition regulators can block or impose conditions on a merger, but Melrose has no meaningful overlap with GKN. Clark can only intervene in a takeover – and so force it to be considered by the Competition and Markets Authority – on grounds of national security, media plurality or financial stability. GKN has a modest defence parts business and its work is not critical to defending the nation. However, this has not stopped Gavin Williamson, the defence secretary, from writing to Clark to raise concern because GKN supplies parts for F-35 fighters, A400M military transport planes and the Ajax armoured vehicles used by British armed forces.

He is not the only Conservative to be concerned, demonstrating that the desire for a more assertive industrial policy has gone across the party divide. Rachel Maclean, Tory MP for Redditch, where GKN is headquartered, worries that 260 staff at the head office will lose their jobs if the takeover goes through, and while she would like Clark to intervene, she acknowledges that, under current law, “he only has a narrow remit”. Citing Airbus, she said that “there are so many things pointing to a takeover not being a good idea” and hoped that “shareholders would think very carefully about the implications of their decision on the economy as a whole”. The MP acknowledges that sentiment in her party is shifting, because “as the economy becomes ever more globalised, policy and thinking has to evolve”.

In November May unveiled an industrial strategy white paper that she said would create “the conditions in which successful business can emerge” and “identify the industries that are of strategic value”. Its approach, however, was focused on investment and tax breaks in a range of key areas, including automotive, rather than takeover protection.

Earlier this month Unilever decided to shift its HQ from London to Rotterdam, where Dutch law offers greater protections against takeovers. Unite highlights alternative options which would help protect companies like it and GKN. One is to give long-term investors extra voting rights to protect from short-term takeovers.

Carr warns: “You do wonder what industrial companies we will be left with in a global world, post-Brexit.”

Troublesome takeovers

Proposed takeovers of British industrial firms rarely pass without comment and a number of deals in recent years have faced concerted opposition. Here are some of the most contentious transactions.

Kraft and Cadbury, 2010

Kraft, the US food giant, was ultimately successful in its £12bn pursuit of Cadbury, one of the most venerable names in British industry. But the process was marked by stiff political and trade union opposition. The then business secretary, Lord Mandelson, warned Kraft against attempting to make a “fast buck” out of the Creme Egg maker, while unions warned that up to 30,000 jobs could be at risk. Kraft prevailed but immediately damaged its reputation by closing a Cadbury factory in Keynsham, near Bristol, despite indicating previously that it might keep the site open. Not only did 400 workers lose their jobs, but the example of Keynsham is still used by unions to warn about takeovers of British industrial firms.

BAE Systems and EADS, 2012

The proposed €35bn (£31bn) merger of Britain’s biggest defence manufacturer and the Franco-German owner of Airbus foundered in the face of political, union and media opposition. The British, German and French governments could not reach agreement on the corporate structure of the business, which would have combined two of the most politically sensitive companies in Europe. Angela Merkel, in particular, harboured the deepest concerns about the deal, for which she saw no strategic logic. Chastened by the experience, neither business has pursued a transformative deal since.

Pfizer and AstraZeneca, 2014

When US drugs giant Pfizer attempted to buy the Anglo-Swedish drugs maker for £69bn, it was attacked on both sides of the Atlantic for admitting that tax savings were a key factor in its bid. David Cameron, then the PM, said he was neutral about the bid, but MPs and trade unions raised concerns over the offer, suspecting that Pfizer would strip out R&D jobs. However, AstraZeneca was also adamant that Pfizer’s approach – at £55 a share – undervalued the company and Pfizer walked away. AstraZeneca is trading at around £48 currently.

Kraft Heinz and Unilever, 2017

Heinz’s £115bn approach for Unilever, the Anglo-Dutch consumer goods group behind Marmite and Magnum ice-cream, fell apart rapidly in the wake of strong opposition from the bid target. Kraft Heinz, the US maker of Philadelphia cream cheese, abandoned its interest after Unilever, which employs 7,000 people in the UK, made clear it had no interest in a deal. Political and trade union disquiet over the proposed transaction had barely started to be heard. But Unilever’s determination to protect itself more adequately against further overtures led to it choosing Rotterdam over London as its main HQ this year.