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Melrose Sharpens GKN Aerospace Axe By Howard Wheeldon, FRAeS, Wheeldon Strategic Advisory Ltd.

 

 

 

 

(Before moving on to talk about Melrose and decisions appertaining to its important GKN Aerospace subsidiary, I will make just one quick comment in regard of events taking due to take place in the House of Commons later today and that, should the Government fail to win, his next move would be to call a General Election on October 14th, a matter which itself would likely be contested by Labour, by casting similar words to those made this morning by a former Conservative Party leader: The greatest danger that the UK faces today in not whether we leave or remain in the EU but the inability to decide and properly action.)

GKN Aerospace

 

 

 

 

I would love to have been in the position to welcome plans announced by GKN Aerospace (now owned by Melrose plc, a company that tells investors that it specialises in buying and improving underperforming businesses) today that the company intends to cut 1,000 jobs over the next two years within a plan that is built around integrating the four existing independent aerospace manufacturing activities, each of which are currently focussed around products and internal capabilities, into one single fully integrated business.

Nice that such an idea might look on paper and to Melrose shareholders of course who have been forced to witness the value of the shares tumble over the past year, I would be particularly concerned about the intention and emphasis made on reducing non-productive staff and what they have called, management complexity. Making yourself more cost effective is always good policy but imagining that getting rid of non-productive staff – those that have considerable expertise and provide the vital link with the end customer – seems to me to present a new set of very different risks. 

Many a company that I have known in the past has thought that it can get rid of proven and workable tier management structures and that all would be well. The GKN Aerospace plan, or should I perhaps suggest as the Melrose management plan is clearly aimed at convincing shareholders that the company is serious about reducing costs. You can’t blame them for that but in the case of GKN Aerospace this means that eventually that some 18,000 personnel working at no fewer than 50 manufacturing sites across 15 countries worldwide including large scale activity in the USA, UK, Netherlands, will find themselves coming under a single management structure. Given the diversity of product, culture and skills, that seems rather a lot for one single management structure.    

Whilst GKN Aerospace management is quite correct in pointing out that the division has, through a combination of acquisition and organic growth grown from sales of just £600 million in 2006 to in excess of £3.5 billion last year it seems to me that given the hugely increased size and scale of GKN Aerospace activities today that for a set of diverse aerospace businesses such as these to operate under a single management structure might be one step too far.

From a company perspective suggesting that the intention is based on wanting to improve operational performance, become more customer focussed and competitive following several years of predominantly acquisition based expansion is fair enough but I rather doubt that this plan will provide Melrose shareholders with an increased dividend anytime soon.

Back in the hotly contested takeover battle last year Melrose made what was interpreted as something of a commitment not to break-up GKN Aerospace. Baring one small closure in Birmingham of which I make no accusation that they have already broken their word (this being because the Kings Norton operation had effectively run out of work) Melrose has genuinely kept to its word so far. Seemingly, I having sat next to a member of the senior GKN Aerospace management team on a flight last year, has Melrose attempted to slow down investment. All that is good news although the bottom line is that many observers believe that when the time is right Melrose will sell GKN Aerospace off.

That GKN Aerospace is doing well and that the previous management did well to grow the division to the size it is today can hardly be disputed. But where is talk about future GKN Aerospace growth strategy I wonder?

As the company announced back in March, Melrose has already begun selling off other parts of GKN including Walterscheid Powertrain Group, a leading provider of original equipment (shafts, gearboxes, attachment systems and clutches) together with aftermarket parts and services for off-highway vehicle and powertrain applications. The buyer was an organisation called One Equity Partners. Founded in 1919 and employing 2,200 personnel when sold off by Melrose, Walterscheid provide a wide range of services for agricultural, construction, mining, and industrial OEM and aftermarket customers in Europe, China and North America.

Melrose had intended to dispose of the Superb GKN Powder Metallurgy division although eleven months since the notion was born the division remains in Melrose hands. Maybe the suggested possible value that was placed on the company by analysts of £1.8 billion has proved to be too much? 

As to GKN Automotive, a global leader in automotive driveline technology and systems, no news is good news I suppose. I have no idea when, whether or even if Melrose intends to hive off this great business or not but unlike GKN Aerospace, no commitment to retain the automotive division was ever made.

CHW (London – 3rd September 2019)

Howard Wheeldon FRAeS 

Wheeldon Strategic Advisory Ltd,

M: +44 7710 779785

Skype: chwheeldon

hwheeldon@wheeldonstrategic.com

@AirSeaRescue  

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