I make no apology for expressing some disappointment that the GKN Board has, in the face of an opportunistic unsolicited £7 billion bid approach from an entity known as Melrose, decided that it will after all break itself up into two separate units.
The issue of separating automotive and aerospace activities has been a matter of discussion for years but until now the GKN board had always contended that because of the cyclical nature of some of its diverse engineering activities that the current group structure remained in shareholders’ best interests.
Even so, the investment community has wanted to see GKN broken up for years just as it had of course welcomed and indeed, prospered from bids and break-ups of many other once great UK based engineering companies such as Hawker Siddeley, Joseph Lucas and TI Group. Such things would never be allowed to occur in Germany and France of course but here in the UK investors care less about the long term future and whether there will be any engineering and manufacturing companies left to invest in. And where are all those once great companies now? Mostly they have gone to that great graveyard of former British engineering companies in the sky for whom the sum of the parts was deemed by investors to be worth more than the whole!
GKN has become well used to bid speculation over the years of course and it is only seven years since, in November 2011. an acquisitive Singapore Group called Quest Global Engineering was rumoured to be about to bid for the company. Rather than a bid, what followed was the forming of a long term relationship between the two organisations. However, back in 2003 GKN was at the receiving end of a bid approach from private equity group Carlyle but despite talks continuing for several months Carlyle was forced to walk away.
As observers ready themselves to see whether Melrose puts up or shuts up over the next 30 days investors should not lose sight that despite the regrettable situation that has required GKN to make massive provisions in 2017 in order to cover issues relating mainly to its US aerospace activities the company continues to fire on all cylinders meaning that all four of the main business divisions – automotive driveline, aerospace, powder metallurgy and additives are strong, growing and profitable.
Although I have known the immediate former GKN CEO, Nigel Stein together with at least seven other former company chiefs in the fifty years that I have known the company – I am fortunate to be able to include the greatest of these in my opinion, Sir Raymond Brookes who over nine years as Chairman and Chief Executive from 1965 transformed the then Guest Keen and Nettlefold and I the process sowed the seeds of what the company is today. I have not yet met with Anne Stevens, a non-executive of GKN since July 2016 and who earlier this month became the latest incumbent to what I would like to describe here as being a very fine set of industrialists.
Anne Stevens takes on the role following the planned retirement of Nigel Stein at the end of December 2017. Her appointment follows the announcement back in November that the planned appointment of Kevin Cummings as the next GKN CEO had been rescinded following the issues in the US that led to massive provisioning being required.
Anne Steven was for many years a senior executive of the Ford Motor Company and it was she who on Friday, in direct response to the unwelcome bid approach from Melrose, announced that GKN would now be “split into two distinct investment profiles and capital allocation policies”.
Following the well versed announcement in October of the need to take charges of £55 million and then a month later, as much as £130 million in additional charges in relation to its North American activities, I will not dwell too much on the issues that have left GKN vulnerable to a bid approach from the likes of Melrose. To me, companies such as Melrose whose mantra is to buy up what they consider to be struggling engineering companies and then sell them on when they have supposedly improved the business, often a we remember from the days of Slater Walker, a euphemism for stripping the assets and loading the company up with debt, are nothing less than vultures.
Now you might well say that Vultures do a pretty good job in the wild scavenging and cleaning up what others left behind but in the corporate world they are often the death knell of fine companies. GKN is a truly global company. Frankly, I take the view that if the automotive driveline activities which began life in shadow factories after the second world war and for which GKN is today to be regarded as the world market leader will, should GKN be taken over, undergo such radical strategic change that would mean the UK in which final assembly of driveline products produced at GKN factories all over the world takes place, would lose out.
The same argument applies should a separated GKN Driveline which includes two and for wheel drive and fast growing electric and hybrid vehicles be left with no protection to a subsequent foreign sale or bid.
Are we ready to see yet another fine British company that has a fantastic history of achievement and a collection of hugely important global automotive, aerospace, powder metallurgy and additives businesses potentially disappear without trace for the benefit of a few Vultures?
To be sure, although not as a shareholder, I admit to having a vested interest in seeing GKN continue to prosper and grow as an independent. You may remember that I have written before that what used to be Hardy Spicer and that is today at the very heart of GKN’s UK automotive driveline manufacturing interests was the very first manufacturing company that I ever visited back in the 1960’s. How well I remember what the late Sir Trevor Holdsworth who had insisted that, as a wet behind the ears youngster, I should accompany him for a complete night shift at the Erdington, Birmingham plant to learn about real engineering and manufacturing. Holdsworth would later become managing director and deputy chairman of GKN through much of the 1970’s and was GKN Chairman from 1980 to 1988.
One of the many strengths of GKN ever since the three companies that make up the acronym of the name that we know so well today [Guest, Keen and Nettlefold] merged in 1902 has been flexibility and always adapting to new markets. Under the excellent leadership of Sir Trevor Holdsworth, Sir Davis Lees and Sir Kevin Smith through the 1980’s to 2011 the tradition of excellence and adapting to new markets and conditions continued. Each of these individual left a big mark on GKN and each played a part in embracing change and globalisation. Nigel Stein, who by the actions of some in the US subsidiaries, is entitled to feel as if last year shortly before he was due to retire had been “mugged” had through his period in office as CEO from 2012 to the end of 2017 continued the same tradition. Indeed, Stein’s excellent acquisitions of Volvo AB engine unit and Fokker Technologies are testament to that.
GKN never was or indeed is to be considered a conglomerate. The strategic modus operandi has always been to disperse the load of potential cyclicality as evenly as you can. GKN has looked after it people and its record of strong industrial relations has been a pleasure to observe. So too has been its investment in its people and skills, apprentices and graduate trainees.
I am fortunate enough to have known many company CEO’s, Chairmen and other board members through my former careers either in business, the twenty-eight years that I then spent as an equity analyst and so on. I have seen change, considerable change in how businesses are managed and run and of how the ‘city’ and investment community came to hate British manufacturing and anything that required long term payback and research and development expenditure. Because I always took the opposite view to my peers I earned the respect of industry and it is this that allows me to do what I do today in respect of strategic influence support. GKN has been there throughout my career and I have no wish to see it destroyed now.
Sir Barrie Heath was another of the former GKN Chairman that I met although I did not know him that well. Of all the GKN Chairman that I remember and that in this case, I did get to know pretty well towards the end of his career and beginning of mine was Sir Raymond Brookes. He himself described one of his main successes during the twelve years he spent at the top of GKN as having made GKN international in spirit. Trevor Holdsworth also described Brookes as being the one who opened [GKN’s] way the way to the future. I liked Ray Brookes enormously and in Andrew Lorenz excellent book ‘The Making of a Business – 1759 to 2009 published by John Wiley and Sons I myself am quoted as saying of Brookes “that he was the last of the great Sixties engineering giants”. A man of huge authority the like of which you rarely see today, someone who commanded genuine respect, had wisdom and humour, was a great thinker and listener and whose ability to motivate through the command of speech was second to none.
I wonder, if they were still around to observe, what the likes of Ray Brookes, Barrie Heath and Trevor Holdsworth would make of what is going on now at GKN and of what they would do? Indeed, I am bound to wonder what some of the surviving former GKN chiefs such as Sir David Lees, CK Chow, Sir Kevin Smith, Marcus Beresford and Nigel Stein make of the Melrose bid approach and more importantly, the seemingly sudden decision by the GKN Board led by Mike Turner and new CEO Anne Stevens to separate GKN’s main units. Probably they will agree that it was, in this day and age and bearing in mind the unfortunate situation that GKN finds itself in, necessary. Indeed, some of them had been under pressure to do just that when they were in the role that Anne Stevens was in today but maybe they were also in a better position back then to say now is not the time.
So there we are – watch this space – perhaps after all the answer is that in this day and age and when the chips really are seemingly down albeit that in all other respects GKN is performing very well, if the company is to survive as an independent it had no choice but to do what its investors have long wanted. That at any rate is how I suspect that GKN Chairman, Mike Turner sees the current situation.
Let us all hope then that if Melrose does come back with a formal bid offer that fails to value GKN correctly and that fails to make industrial logic and sense that change and the combined efforts of all will see them off!
CHW (London – 14th January 2018)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785