Ahead of what will be an extended weekend break for me in the delights of Cornwall, today’s commentary piece will be the last until Tuesday or Wednesday of next week.
What follows below this paragraph is copy of a piece I wrote and that was published in the April edition of ‘The Business Influencer’. Having yesterday announced a £500 million share buy-back following the sale of another US business, a move which saw its shares jump 11%, I note this morning that in an interview with Calum Muirhead published in the Daily Mail Melrose CEO Simon Peckham is quoted as saying that ‘all options’ were on the table regarding the future of GKN and apparently, options included a sale to private equity or a stock market listing and that in regard of GKN Aerospace which the company committed to keep for 5 years, a period which expires in the middle of 2023, ‘if someone offers us the right price we will sell it’.
‘Hostile takeover bids have thankfully become a rarity these days and I live in hope rather than anticipation that the heavily contested £8.1bn battle fought out between Melrose and GKN back in 2017 will have been the last that we see for some considerable time.
Agreed bids and deals are a however a very necessary part of business life and long may that continue. Where the decision is based on taking over a competitor to expand, industry consolidation, diversification or potential seller recognising that merging with another is the only way to get round product maturity, benefits for both sides of an agreed deal most often make good sense for those involved including employees. It doesn’t always work out like that of course and it can be very expensive if a buyer gets it wrong. Due diligence is crucial and even then, some get it wrong. Different cultures and system of operation can often be a problem and sad to say that a great many companies that have acquired competitors or sought to diversify have lived to regret it.
As I said in the last issue of ‘Business Influencer’ I have no issue with UK companies falling into foreign hands provided that the plan is accompanied by guaranteed commitments from the potential acquirer of the business in respect of jobs and future investment. True, commitments can sometimes prove to be worthless and agreed deals do turn sour – look no further than Varity Corporations agreed merger with Lucas Industries in 1996, a deal that not only sold Lucas shareholders disgracefully short but also made little industrial sense. All but wrecked, the remains of Lucas Varity were acquired by TRW in 1999 and sadly, very little remains of what was not so very long-ago to be regarded as Birmingham’s most famous and influential international companies.
All this begs the question, Is GKN under Melrose management headed the same way as Lucas Industries?
The worst possible type of acquisition is one in which the central aim of the buyer is to strip the company of its assets and cash and then gear the company up in order to take a quick buck either selling it on to management, a would-be buyer or maybe attempting to float it on the Stock Exchange.
Debenhams is a perfect example of what I mean here and it was sad to watch this once fine retail store group bought and sold several times in the space of twenty years before the company finally died smothered in debt.
Another similar strategy, one perfected by Jim Slater, was to acquire a perfectly good and profitable company and then close it down in order to realise the valuable property assets. An example of this was Jim Slater’s 1972 acquisition of the small yet highly successful toy and stack-a-bye chair manufacturer, J. Sebel & Co in Erith, Kent and whose former premises are sad to say, now a housing estate.
Fear not, I am not seeking to place Melrose into the same category as what became Slater Walker but that said, there may be some similarities with the strategy adopted by some of the once great conglomerates before they too fell out of fashion.
If I was to be kind and stick to the carefully written Melrose PR script, I would be obliged to say that Melrose is a company that acquires poorly performing businesses, attempts to improve them by making them more efficient and competitive before selling them on. However, If I was to take the opposite view, I would say that Melrose is little more than a company that buys and breaks up companies in the belief that the parts are worth more than the whole.
Back in the years that GKN was struggling and failing to please institutional shareholders Melrose clearly decided that there were some rich pickings to be had by acquiring GKN. They were certainly right on that view and GKN had certainly been undervalued by the stock market for decades. The probable belief was that all you had to do was shake the tree, shed staff, close factories such as the primary driveline operation in Birmingham (formally Hardy Spicer) and in that case, spread the CVJ assembly function to existing GKN Continental European and Asian plants and then sell that particular large piece of real estate to developers.
GKN was of course a very much larger company than Melrose and despite many faults, suffice to say that GKN management knew their business well. For Melrose, acquiring GKN was a huge gamble and without doubt, very high risk. It was the Dunlop of its day, a reminder of BTR’s well planned hostile bid for Birmingham based Dunlop Holdings back in 1985.
The ‘City’ may have no particular love affair with engineering and manufacturing companies but over time, it also came to dislike what became known as conglomerates such as BTR.
Buying large complicated engineering and manufacturing companies is certainly not for the feint hearted and it can often backfire. BTR’s takeover of Hawker Siddeley in 1992 is perhaps a classic example of this and one that would very soon become a thorn in the side of BTR and arguably, lead to the demise of what Sir Owen Green had created.
Melrose didn’t get off to a good start with GKN and its own share price struggled on lack of positive news. Following the takeover, the first part of the Melrose plan that found its way into the public domain was one that envisaged the selling off GKN’s Powder Metallurgy business. Powder Metallurgy was undoubtedly an important and valuable business for GKN but it seems no one was prepared to pay the price (estimated by analysts to have been around £1.5bn) that Melrose required and within six months the idea was abandoned.
Professor David Bailey of Birmingham University Business School and who is a very highly respected and influential automotive industry specialist has long shared my concerns that Melrose would, as soon as the opportunity arose, attempt to break GKN up.
But before that process could begin to emerge there were a few constraints that Melrose would have to work through first. One was the commitment to retain GKN Aerospace until at least 2023. And there was another large elephant in the room as well – Brexit – one that along with the subsequent impact of Covid and various shortages of vital components such as PCB’s that forced automotive OE manufacturers to cut output, meant that breaking up GKN and making money just got a bit harder.
David Bailey’s view that “The Melrose playbook has always been to buy, cut costs and the sell. The first two elements of that strategy are sadly all too evident at GKN since its takeover by Melrose after a highly contested takeover in 2018” is one that I share. He says that “Job cuts here in the Midlands have come at the GKN’s Redditch head office, GKN aerospace in Kings Norton and next up, at GKN Automotive at Erdington. Jobs have gone elsewhere too in the UK, especially in aerospace” adding that “my back of a vape-packet sums suggest at least 900 jobs lost to date in the UK since the Melrose takeover”.
Bailey goes on to say that “Assembly of drivelines at Erdington was always going to be challenging with post Brexit trade barriers given that components come from all over the EU to be assembled in Birmingham. But the sad fact is that there was a better alternative on the table instead of GKN being taken over. In fact, GKN had itself proposed merging its auto division with Dana and focusing GKN on aerospace. That could have enabled the driveline business to continue in the UK with more in the way of local components. Sadly, that opportunity was lost”.
It is now the best part of four years since Melrose announced that it had succeeded in its hostile bid for GKN – a prize I might add that it won by a tiny margin of just 2%.
To be sure, Melrose success was hard won and all credit to them for achieving that. But, despite a few vague promises of intention to investing in the business [there has, to be fair, been some investment in GKN Aerospace) sad to say that Melrose management has learned very little about the importance of building businesses not to mention the value of retaining sovereign capability, skilled jobs, investing in the business and putting in place a strategy that could potentially further grow GKN’s world leading businesses such as automotive driveline equipment and aerospace components.
Melrose, whether we like it or not, is really about making a quick buck, buying and then selling businesses. I doubt that Melrose management cares a damn about GKN staff, about creating jobs, building on the excellent technologies GKN has developed – all Melrose is interested in is dressing the shop window and selling the bits at a profit.
From an interview given to the Sunday Times and that bought into the Melrose hype, we know that Melrose is considering the possibility of ‘floating’ some of the GKN business. No doubt in the case of GKN Aerospace that is because in the aftermath of Covid the aviation world has significantly changed as perhaps has the value of the division.
I am bound to wonder whether investors really would pile into either GKN Automotive or GKN Aerospace as independently quoted companies? Indeed, I fear that they would run a mile. Why? Not because both are good businesses to be in but just as GKN’s former management had, they too would have to look over its shoulders at shareholders for each and every move forward.
In that Sunday Times interview or should I better say self-promotion, Melrose CEO Simon Peckham boasted that as soon as the GKN deal had completed, he went up to GKN’s Redditch Head Office and personally made 100 people redundant. If nothing else, those remarks spoke volumes for what this company is really all about.
Of course, Melrose isn’t the first to down this avenue and they won’t be the last. Remember Owen Green’s BTR plc, Barrie Stephens Siebe plc, Greg Hutching F H Tomkins and companies such as Hanson Trust, C H Industrials and as already mentioned, the one who gave birth to the era of asset stripping back in the early 1960’s, Jim Slater of Slater Walker.
It was the likes of Sir Raymond Brooks, Sir Barrie Heath, Sir Trevor Holdsworth and Sir David Lees as CEO’s that built GKN to what it became at its peak. They had but one purpose in mind, building GKN’s future. Who is looking at GKN’s future now?
A Brief History of Guest Keen Nettlefold (GKN)
1759: Nine businessmen form an iron-smelting works in southern Wales called Dowlais Iron Works.
1767: John Guest becomes manager of Dowlais Iron Works, the beginning of the involvement of the Guest family in the business.
1851: The grandson of John Guest becomes sole owner of Dowlais Iron Company.
1854: John Sutton Nettlefold enters into a partnership to make custom woodscrews.
1856: Arthur Keen enters into a partnership to manufacture an automatic bolt-making machine.
1864: Keen’s business goes public as the Patent Nut & Bolt Company.
1880: Sutton’s business goes public as Nettlefolds Limited.
1900: Dowlais Iron Company and the Patent Nut & Bolt Company merge to create Guest, Keen and Co. Limited.
1902: Guest, Keen and Co. acquires Nettlefolds; the company changes its name to Guest, Keen and Nettlefolds Limited.
1920: Company acquires John Lysaght and with it, Joseph Sankey, maker of steel auto parts–marking GKN’s entrance into the auto industry.
1951: The U.K. government nationalizes the steel industry, including GKN’s steelmaking companies.
1955: The steel industry is denationalized and GKN buys back its steel companies.
1962: GKN enters the defense sector.
1966: Company acquires Birfield and its minority stake in Uni-Carden, maker of constant velocity joints (Hardy Spicer Ltd).
1967: The company’s steel operations, now called GKN Steel Company, are renationalized.
1974: One of the company’s founding operations, the Dowlais plant, leaves the company orbit; GKN Chep, a joint venture pallet pooling service, is formed with Brambles Industries of Australia.
1981: GKN and Brambles join forces again to take over waste disposal firm Redland Purle, which is later known as Cleanaway.
1983: GKN acquires Meineke Discount Muffler Shops.
1986: Company adopts the name GKN plc; most of its remaining steel operations are divested.
1988: A minority stake in Westland, a U.K. helicopter maker, is acquired.
1994: GKN gains full control of Westland through a hostile takeover.
1995: Company makes its final exit from steelmaking.
1998: Company combines its armored vehicle operations with those of Alvis, in return for 29.9 percent stake in Alvis.
1999: GKN acquires Interlake Corporation.
2000: GKN and Finmeccanica of Italy merge their helicopter businesses into a 50–50 joint venture called AgustaWestland.contested £8bn battle to acquire GKN
2012: GKN acquires Volvo Aero for £633million
2015: GKN acquires Dutch Aerospace company Fokker Technologies for EUR706 million.
2017: Acquired by Melrose plc in a hostile bid for £8.1bn
CHW (London 9th June 2022)
Howard Wheeldon FRAeS
Wheeldon Strategic Advisory Ltd,
M: +44 7710 779785