How GKN's boardroom woes left it vulnerable to attack

UPDATE: Melrose ups the ante on GKN hostile takeover bid.

by Andrew Saunders
Last Updated: 19 Mar 2018

They call it the corporate jungle, and not without reason. Life at the top of UK plc can be red in tooth and claw, and any sign of weakness or vacillation may be pounced upon by investors hungry for a more substantial financial meal.

Such is the case with the recent £7bn cash and shares bid made by turnaround specialist Melrose for troubled FTSE 100 engineer GKN. After being rejected out of hand as ‘entirely opportunistic’ by the GKN board, Melrose then turned hostile, upping the bid to £7.4bn and then £8.1bn, before further sweetening the pot with a promise to invest £1bn into GKN's pension fund.

The increase is partly attributable to the rise in Melrose’s share price after making the first bid. That, plus the fact that GKN’s shares hit an all-time high of 442p (they're now at 429p), is a pretty unambiguous sign that the market is up for the deal and that GKN now has a real fight on its hands.

Melrose wasn’t likely to retire without a fight, especially after it received the blessing of US activist investor Vulcan Venture Partners, which holds around 4% of GKN’s shares. Vulcan’s boss CT Fitzpatrick stated in an email in January that he wanted GKN to open negotiations with Melrose.

The fact that investors are still reeling from last November’s shock profits warning - resulting from a £130m write down in GKN’s US aerospace business – has helped Melrose’s cause. But GKN’s underlying businesses – it is a major aerospace contractor both in the UK and the US and also a top drivetrain and gearbox component supplier to global automotive manufacturers – are essentially sound, if underperforming.

It is arguably the sorry tale of its boardroom bungles and new leadership problems heaped on top of old ones that encouraged the watching predators to stop circling and actually move in for the kill.

Try this for a case study in how not to handle CEO succession. Back in September – before the profits warning remember – it was announced that then CEO Nigel Stein was to step down, replaced by GKN insider Kevin Cummings. 

Then came the problems with inventory – which in all likelihood means that someone did the corporate equivalent of tripping over a pile of forgotten junk at the back of the shed.

That embarrassing discovery of excess stock ultimately led to £130m of writedowns and the announcement that CEO designate Cummings would be leaving the firm, even before the man he was supposed to replace. Oops.

Thus Stein had to stay on until an interim CEO could be hastily found – veteran Ford exec and GKN NED Anne Stevens.  Losing one CEO is unfortunate, losing two almost at the same time looks like carelessness, as Oscar Wilde might have said.

Stevens has now been appointed permanent CEO, a move welcomed by many shareholders even though she is not as well known in the UK as she is the US. They are probably just grateful for a bit of stability at the top.

Throw in an activist investor not known for patience and always looking for ways to maximise shareholder value, and if you were trying to invent a scenario for an MBA business game about how to precipitate a takeover bid you couldn’t do much better.

So Guest Keen and Nettlefold, as it used to be known, a firm which can trace its roots back to 1759 and the early days of the industrial revolution, is now ‘in play’ as the M&A guys and gals say.

Whether it is Melrose that walks away with the prize or someone else, the likely outcome now is that the business will be sold. For chairman Mike Turner, having presided over this not-so-funny comedy of errors, all that really remains to be settled is the question of price?

Image credit: GKN

This article was originally published on January 16.

Andrew Saunders

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