If Investors Weren't So Supine, Who'd Need Hostile Takeovers?
(Bloomberg Gadfly) -- The political classes are up in arms about the hostile takeover and likely breakup of British engineering firm GKN Plc by -- take your pick -- an asset stripper or successful turnaround company.
But the response shouldn't be to make takeovers more difficult. The right question is why shareholders couldn't, or wouldn't, nudge GKN to break itself up from a position of strength before a bid ever materialized.
The company's constituent auto and aerospace businesses have limited synergies. Analysts and investors had called for their separation for years. Melrose Industries Plc parked its tanks on GKN's lawn in January, prompting the company to say it would indeed do the splits. Within weeks, GKN had struck a decent deal to merge its autos arm with a U.S. peer so the remainder could become a focused aerospace company. But Melrose's bid still won shareholders over.
Melrose's plan is to lift margins in GKN's businesses before selling them, most likely separately over time.
Imagine if GKN had announced a breakup back in 2014 when the shares were at 415 pence -- roughly where they are today after Melrose's offer. The stock would have jumped on the announcement. Making aerospace a distinct business would have created more transparency and accountability around it. This might just have prevented the mismanagement that led to last year's profit warnings.
Upon separation, the demerged auto unit and remaining aerospace stock would have attracted new investors, further supporting their share prices. The two new GKNs would have been less vulnerable to being taken over despite being smaller -- and any bidder would have had to pay a full price.
The board, chaired by Mike Turner, is culpable for not grasping the nettle sooner. Maybe it didn't want to be branded as the team that broke up a 259-year-old company. The directors also had an incentive to back the status quo: the structure was a deterrent to a bid from an industrial rival. It's hard to see either a pure aerospace or autos company coveting such a twin-bodied conglomerate.
Faced with this inertia, investors ought to have spurred the board to action. Whatever pressure directors came under, it was clearly insufficient. There were no heated AGMs discussing resolutions on a demerger. Regular disclosure about shareholder engagement would be one useful outcome of the GKN sale.
Might things have been different if the register contained fewer index funds? Perhaps, although it was the support of passive Legal & General funds that reportedly helped carry the day for Melrose.
Passive products give clients a low-cost way of investing, and don't have the resources to pay for people who can engage with inert management teams. One remedy would be for the funds to add a "stewardship surcharge" to their fees to pay for this activity. Better engagement might lead to better investment performance -- but what fund is going to raise its charges before the competition?
There are no easy answers. Whatever else, it would be better if the U.K. nudged shareholders into engaging more forcefully with its GKNs rather than tried to stop takeovers.
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: Edward Evans at eevans3@bloomberg.net.
©2018 Bloomberg L.P.