GKN and Melrose – The Great British Takeover

Jack Hickman

The protracted and only recently concluded hostile takeover of engineering giant GKN by turnaround specialists Melrose dominated the business pages from start to finish, as the largest contested takeover since Kraft bought Cadbury in 2009, and was a throwback to old-school hostile takeovers and corporate raids.

Central to the battle were the competing communications strategies of the two sides, with each trying to convince shareholders of the merits of their respective turnaround plans for the venerable engineer. Here, we look at two key questions from a communications standpoint: why was it so close, and why did Melrose eventually win?

Why was the vote so close?

On the face of it, one might have expected Melrose’s bid to have been a no-brainer for the shareholders of GKN. The engineer had been struggling in recent years, culminating in a series of profit warnings in 2017 and an embarrassing U-turn on the appointment of a new CEO in November.

By contrast Melrose had delivered a 3000% return to shareholders since its inception in 2003, and had only failed to turn around one business in that time. Yet on March 29th, with a Brexit-esque winning margin, only 52.43% of investors holding voting rights backed the bid.

From a communications perspective, the reasons for this are two-fold. Firstly, despite its travails, GKN has an evocative history to call upon. The 259-year old engineer made cannonballs to fight against Napoleon, and Spitfires in the Second World War – albeit less than 5% of those produced. The prospect of an old and nationally historic firm losing its independence in a more protectionist political and media environment post-Brexit was a bitter pill for some to swallow.

Despite this, as we now know, Melrose won. In terms of messaging, GKN’s defence had three key issues: complexity, inconsistency, and lack of differentiation

Secondly, Melrose had some messaging challenges of their own. Their usual model has been to turn around and sell businesses within five to six years, raising the question of whether they could be suitable stewards of a long-standing business, in an industry where long-term contracts and commitments are the norm. Similarly, their tendency to sell businesses on to the highest bidder and then pay their four chiefs handsome bonus packages left them open to accusations of corporate raiding and asset stripping.

Why did Melrose win?

Despite this, as we now know, Melrose won. In terms of messaging, GKN’s defence had three key issues: complexity, inconsistency, and lack of differentiation.
GKN’s defence of its independence was complicated.

It started by arguing that Melrose’s initial offer was a ‘false premium’ that would see the business broken up before proposing the sale of first its Powder Metallurgy business, and then its Driveline operations (the latter of which would have saddled its investors with shares in a complex, dual listed business). It then raised future dividend targets while still pointing towards pension fund deficits for GKN workers, and cited national security concerns, even though GKN does not rank in the top 50 suppliers to the British military.

Contrasted with Melrose’s mantra of ‘Buy. Improve. Sell.’, and its fundamental message that its management could do a better job than the GKN incumbents, and its clear to see why GKN’s multi-pronged attacks fell short in the face of Melrose’s more consistent and structured approach.

Similarly, GKN’s attempts to wrap itself in the Union Jack while painting Melrose as hostile asset strippers also failed to hit home, given Melrose’s own British credentials and the fact that less than 10% of GKN’s total workforce is based in the UK (with its hastily appointed CEO, Anne Stevens, an American).

To add insult to injury, in the final week of the debate, GKN declared that it had the support of a majority of its shareholders in an ill-advised Sunday newspaper interview only to be forced to retract this statement a day later as it emerged that they couldn’t verify the claims.

However, perhaps GKN’s biggest communications failing was that it simply didn’t do enough to differentiate its plan from that of Melrose. Both essentially entailed selling some non-core and underperforming assets in order to raise margins and pump money into GKN’s pension schemes.

With the substance of the plans relatively similar, the decision for shareholders came down to which management they preferred: the incumbent, who were tainted by association with GKN’s struggles, or Melrose, a credible challenger offering a fresh start.

What can be learned?

The first lesson is that no matter the spin, a firm’s intrinsic qualities come to the fore. GKN was fundamentally underperforming while Melrose, despite their strong track record, could never shake accusations of profiteering.

Secondly, and perhaps most importantly, a simpler message that is consistently delivered trumps a complex and multifaceted narrative.

And finally, if you’re going to emphasise your British credentials and cite national security concerns, you need to be able to support your argument with facts as well as emotional rhetoric.