What's going on?
After failing to woo the top brass at British engineering firm GKN, turnaround specialist Melrose Industries has gone rogue and is attempting to mount a hostile takeover – the UK’s biggest since 2009.
What does this mean?
Melrose has made a pretty penny buying up companies, restructuring them, and then (ideally) selling them off for a profit. With GKN, Melrose envisions selling off non-core businesses before splitting up the firm into separate automotive and aerospace companies.
Following the rebuff of Melrose’s initial overtures, GKN’s management promised to make just these sorts of changes itself. But Melrose crashed the party, directly offering GKN shareholders £7 billion in Melrose shares plus cash for the company on Wednesday. GKN now has to convince shareholders that the future is brighter without Melrose, while Melrose may have to raise its offer in order to entice shareholders to get on board with its plans.
Why should I care?
For markets: Past mistakes will make it harder for GKN’s management to win over skeptical shareholders.
GKN had a rough 2017, issuing a profit warning after problems in its aerospace division. Melrose’s pitch is that its superiority to GKN’s management is worth investors taking a smaller slice of the pie: through the share swap, it’s offering current GKN shareholders a roughly 50% stake in any combined GKN-Melrose operations. GKN’s management obviously disagrees – but last year’s problems may have dented its credibility.
The bigger picture: Hostile takeovers need a mixture of willing shareholders and friendly regulators to succeed.
For a deal like this to go through, investors’ faith that the current management can turn around the business has to be fairly low. There’s also concern here that trustees for GKN’s pension scheme – which posted a £1 billion deficit last year – might work to scupper the deal if the pension program isn’t adequately protected and reformed (something similar happened when a private investment firm tried to take over WH Smith in 2004).