GKN Fails To Fight Off Takeover Bid

 - April 5, 2018, 5:50 AM

Last week the long-running battle to take over GKN ended in success for turnaround specialist Melrose Industries, as shareholders voted for the £8.1 billion ($11.4 billion) deal despite protests from politicians, unions, and industrial groups over the firm’s importance to the UK manufacturing base. Melrose gave commitments to the UK government that GKN would continue as a UK business, that it would continue with specific research and technology programs, and that it would not in the short term sell the defense-related businesses.

GKN is among Britain’s oldest industrial companies (259 years) although its UK workforce has fallen steadily from 69,000 in 1979 to 6,000 today. It now employs 58,000 worldwide. Its aerospace division is a materials specialist producing components for everything from airliners to the Lockheed Martin F-35 Lightning fighter, now in service on both sides of the Atlantic, while the company’s automotive (Driveline) division is a supplier of gearboxes.

As last week’s shareholder vote arrived, hedge funds and short-term speculators ended up owning some 25 percent of the company’s stock and the vote ended 52 percent in favor. Despite protests, it seems unlikely the UK government will step in to stop the deal given that GKN is not a top-50 supplier to the UK Ministry of Defence, meaning arguments linked to national security or public interest could fall on deaf ears, according to many commentators.

The company’s board had attempted to persuade shareholders that it would improve and return more value to shareholders, but Melrose countered by making several promises such as GKN remaining a UK-based company and continuing its high level of investment in research and technology development (R&TD).

The biggest question now is how GKN’s customer base will respond to potential disruption to an important supplier. Airbus, with which GKN has several contracts, had warned strongly against the acquisition and suggested future contracts could be jeopardized if GKN was more likely to be broken up than continue as a stable company that invested heavily in R&TD.

Before the bid from Melrose, which surfaced in January, GKN had seen a steady fall in profitability. Then more recently problems at the company’s U.S. aerospace division saw GKN appoint Anne Stevens as CEO rather than Kevin Cummings, and then Stevens tried to forge a merger of Driveline with Dana of the U.S. Melrose is now poised to reform the board if the UK government decides not to block the acquisition.

The UK government could intervene in two ways. It could seek to make Melrose’s assurances to the Takeover Panel binding through section 172 of the Companies Act 2006; or it could go one step further and use the Enterprise Act 2002 to refer the matter to the UK Competition and Markets Authority on grounds of national security.