(Bloomberg Gadfly) -- Jeremy Corbyn is livid about one British industrial company trying to buy another to create an engineering giant with more than 64,000 employees worldwide and sales of 12 billion pounds ($17 billion).
Unlike past U.K. deal controversies, there's no overseas predator in sight this time -- at least, not yet. The Labour Party leader's questioning of whether Melrose Industries Plc's bid for GKN Plc would bring benefits, without making it an issue of flag-waving patriotism, is welcome. But his call for a "public interest test" on takeovers raises the old problem of how a government decides which deals are good and which are bad.
Britain is an open market, making it easy prey for dealmakers. Politicians scream when bidders come from abroad -- think Pfizer Inc's unsolicited approach for AstraZeneca Plc in 2014 or the Kraft takeover of Cadbury in 2010. Concerns are legitimate. A foreign takeover leads to the loss of head-office functions, and so management talent gravitates elsewhere.
But domestic deals deserve political scrutiny too. The buyer may bite off more than it can chew or take on too much debt. A misconceived or badly executed takeover weakens the combination, making it less able to support jobs and pension schemes.
Corbyn wants a broad test to prevent deals that "destroy the industrial base". Something similar was explored and rejected after the AstraZeneca and Cadbury assaults. The associated difficulties haven't gone away.
A formal test would damage Britain's reputation for openness, which supports growth. Worse, politicians and bureaucrats would adjudicate on dealmaking. It's a recipe for inconsistent and arbitrary decisions.
Melrose versus GKN illustrates the challenge. Corbyn's concerns include the takeover being "debt-fueled" and led by "asset strippers". The 7.1 billion pound ($9.9 billion) Melrose offer is 80 percent in its shares, with the rest in cash funded largely by borrowing against GKN's balance sheet. The bidder's model is to "buy, improve and sell". Unless something changes it would be looking for an exit probably inside five years, potentially disposing of GKN in its three constituent parts.
The difficulty is that GKN has become vulnerable because it was managed badly. It prioritized growth over profitability. The company needed a change of management, strategy and culture. A hostile takeover is one way to deliver that. Even the attempt forces the target to up its game.
Under siege, GKN has a new executive team making the changes it requires. The strategy also involves a staggered break-up. Either way, "old" GKN is going to disappear.
Melrose's weak spot is that its model, requiring an exit in the medium term, might not suit a business that is cyclical and needs investment in projects where the payback is further out. That said, it knows it would struggle to sell an under-invested business to a new owner.
The complications of a wide-ranging test mean it would be better if ministers made their voices heard in M&A on a case-by-case basis. No bidder wants to do a deal that makes an enemy of the government.
Financiers almost always want deals to happen. If Corbyn's intervention signals a deeper scrutiny of takeovers, regardless of nationality, bring it on.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
Chris Hughes is a Bloomberg Gadfly columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.
To contact the editor responsible for this story: James Boxell at jboxell@bloomberg.net.
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