What’s the controversy over Melrose’s hostile takeover of GKN?

What is GKN?

GKN is the UK’s third largest FTSE-100 engineering company – behind BAE Systems and Rolls-Royce. It employs 59,000 staff, with 6,000 in the UK.

The business traces its roots back to 1759, when it started life as an ironworks in south Wales. By 1902 it was Guest, Keen and Nettlefolds and the biggest iron, steel and coal business in the UK. It was a major armaments manufacturer during both world wars, making Spitfires and steel helmets.

GKN shareholders accept Melrose’s £8bn hostile takeover

Read more

It later moved into the automotive and aerospace industries. It makes components for both Boeing and Airbus, while its Driveline business is used by carmakers including Ford and Jaguar Land Rover. Another business, Powder Metallurgy, makes high-tech materials for coatings.

What is Melrose?

A “turnaround” business which specialises in buying poorly performing businesses, improving them, cutting costs and selling them on. The company’s motto is: “Buy, Improve, Sell”.

It was started by three executives: Jock Miller, David Roper and Simon Peckham, two former accountants and a lawyer respectively, in 2003. In the 15 years since its flotation it has made returns of 3,000%.

They have made four big acquisitions and turned Melrose from a £10m company to one valued on the stock market at more than £4bn. The firm has 12,000 staff and last year the three bosses, plus the finance director, shared a bonus pot of £160m.

Melrose trio who sought biggest deal yet with GKN – and biggest challenge

Read more

Why did Melrose bid for GKN?

It is what Melrose does. But this was a big one. GKN is bigger than Melrose and its biggest deal to date.

GKN’s defences were low. It was a humdrum, no-fireworks firm but last autumn the share price was battered when it had to warn of lower profits after problems at its US aerospace business. The man running that business had been lined up to run the whole group. Instead, he was ousted before he even started and GKN had no boss. A former US car industry executive, Anne Stevens, was given the job when Melrose launched its £7bn bid.

Why the controversy?

Melrose is an asset-stripper – it break firms up and sells them. It regards five years as the long-term and the top trio have huge pay deals. They have admitted they would axe jobs. The three executives could make more than £285m out of this deal. Trade unions and some MPs have been very hostile. The Tory MP Robert Halfon described Melrose as “robber baron capitalism at its worst – many British jobs being destroyed by the few, corporate vultures plundering a company for short-term profits but long-term disaster”.

What did GKN do?

The firm said it would sell its powder metallurgy business and merge its Driveline business into a US rival, giving cash and Dana shares to its investors. This is basically the Melrose strategy too – and Melrose upped its bid to £8bn.

Couldn’t the government stop the deal?

The business secretary didn’t really get involved until this week, when he extracted a few limp promises from Melrose. Ministers can stop mergers for national security reasons, but they don’t apply to GKN. In the same situation, other EU countries would likely take a far tougher line.

Who will benefit from the deal?

GKN shareholders will get 40% more than their shares were worth two months ago. They will also get to share in future gains made by Melrose. GKN’s pension funds will get £1bn injected into them over five years – part of the Melrose offer. City advisers, bankers, PR advisers and lawyers from both sides have racked up huge fees – probably more than £200m. Hedge funds have built stakes in the business in recent weeks, betting that Melrose would win. Stevens said of GKN’s hedge fund investors: “They could not give a crap.”

Who won’t benefit?

GKN’s directors and hundreds of GKN workers are expected to lose their jobs.

Who said what after Melrose won?

Miller: “Let me assure you that GKN is entering into very good hands.”

Michael Heseltine on the Melrose victory: “No other country would let this happen.”

The Labour MP Jack Dromey: “The British national interest sold down the river. A bleak day for British industry. The takeover by Melrose makes a mockery of any talk by government of an industrial strategy.”

Frances O’Grady, the TUC general secretary: “Ministers got involved far too late and effectively rolled over.”