Why the Melrose bid for GKN is really none of our business
This is not obviously an issue of public policy. Putting the names aside for a moment, what is happening here is that two sets of managers are competing to convince the owners of a business that they are the best people to improve its performance. All stakeholders should then benefit, including employees, pensioners, customers and taxpayers. In this case, one set of managers is the existing in-house team, the other is a firm that specialises in buying companies that it believes are undervalued and restructuring them before selling on. I do not know who would do a better job. More importantly, though, neither does the government or, I suspect, most of the people contributing to the debate.
Nonetheless, a dazzling array of ‘special circumstances’ have been suggested to justify state intervention in favour of the incumbents. Initially, opponents raised fears that the purchaser would saddle GKN with excessive debt and undermine its pension fund, potentially requiring a taxpayer bailout. The pensions regulator has also expressed concerns here, which Melrose now appears to have addressed.
This has quickly broadened into a debate about the need for an activist industrial policy to protect strategically important companies, especially from the risks posed by ‘short-term’ business models. Some opponents of the bid have underlined these points by stressing GKN’s role as a supplier to the UK automotive and defence industries, while characterising Melrose itself as an ‘asset stripper’ and some shareholders as only being interested in getting rich quickly.
A lot has also been made of GKN’s British heritage, even though it now describes itself as a global company and only 10% of its staff actually work in the UK. We can only guess what would have been said if Melrose were not a British company too.
Whether any of these arguments stack up depends on the incentives of the parties concerned and the underlying economic realities. For example, the assistant secretary of the Unite trade union, Steve Turner, has said of Melrose, ‘they take over businesses, they break businesses up, they compartmentalise them and then flog them off to the highest bidder in order to maximise shareholder value’. As it happens, GKN’s current management are proposing to sell its Driveline automotive division, a move which Melrose opposes. But even if this were Melrose’s plan, the fact that a company might be worth more in parts than as a single entity would imply that breaking it up is the right thing to do.
Indeed, the assertion that we should be worried if shareholders might want to make a fast buck by selling to the highest bidder is flawed, for two reasons. First, unless the purchaser is an idiot, they will presumably want to make a success of the business to realise a decent return on their investment. Second, in this case the incentives are fully aligned. This because existing GKN shareholders are being offered a mix of cash and shares in Melrose. If the new owners did mess it up, these shareholders would suffer too. In other words, it will not be possible for them to make a short-term gain without long-term consequences.
Despite this, the government has responded to the political storm by placing additional conditions on any takeover by Melrose. These essentially build on the requirement of section 172 of the Companies Act for directors to have regard to, amongst other things, the interests of the company’s employees and business relationships with suppliers, customers and others. Melrose has responded by making specific commitments, including on R&D, training, employment rights, and pensions. It has also promised to maintain a UK headquarters for five years and not to sell GKN’s Aerospace Division before 2023, unless the government agrees.
If the bid is successful on these terms, the government (and some opponents) would probably view this as a win. In reality, these conditions are not particularly onerous. They are the sort of things that a well-managed business would do anyway, in any sector, and the five-year horizon is consistent with the usual timescale under which companies like Melrose operate.
But there is also a cost to government intervention, especially one that puts additional barriers in the way of market forces. The real short-termism here may be the political pressure to protect companies from change when what they actually need is fundamental reform, which would benefit all concerned. Even if a bid is unsuccessful, the threat of takeover helps to keep management on their toes. Investors also need to know that they can buy and sell freely if they are going to choose to put money to work in the UK. In general, then, the shareholders who own a business should be left to decide whether a proposed deal is a good one.