The hostile takeover of GKN could put national security at risk
4 min read
Melrose's takeover bid is profoundly worrying. Theresa May must prove the strength of her commitment to an economy that 'works for everyone' and put the public interest first, writes Adrian Bailey
The hostile takeover bid for GKN by hedge fund Melrose is both bizarre, profoundly worrying and a challenge to the Government’s industrial strategy.
GKN is a historic British Company with an international footprint worth over £6.5bn in total. In 2015, it employed over 6,000 people in the UK, had 14 sites with sales of over £16bn and contributed £1.36bn to the economy.
It legitimately is described as the world’s first tier supplier particularly in the automotive and aerospace industries.
GSK holds the position at least in part for its research, advanced technology and trusted business relationships with multi-national companies worldwide.
It is a company of enormous strategic importance to the British economy.
Whatever its future, it is difficult to see what Melrose can offer. As a hedge fund operator, it claims to specialise in buying, investing and then selling off companies. Not only is GKN over six times as large as any other company it has taken over to date, but its basic business strategy is not compatible with the long-term investment, research and technology development that GKN specialises in.
It is difficult to see what advantage the takeover can bring to anyone other than Melrose and, debatably, GKN shareholders. GKN have countered with strong proposals designed to convince their shareholders to reject the bid.
However, the debate about shareholder value cannot be the only consideration of this Government. The proposed takeover highlights flaws in our governance of takeover bids that were previously exposed during the Kraft/Cadbury takeover and subsequently the Pfizer attempt to take over AstraZeneca.
Takeover battles historically benefit city lawyers, bankers, accountants and other advisers (estimated to be £400m in the Kraft/Cadbury case.) And sometimes, in the short-term shareholders.
There is little evidence of long-term benefits to the companies involved but plenty of evidence to demonstrate the cost to society and the economy of the redundancies that almost inevitably ensue.
If the Government really wants to rebalance the economy, and inject long-term thinking into manufacturing investment, then a stronger Takeover Code is necessary.
The 2002 Enterprise Act allows the Secretary of State to intervene in mergers where they give rise to certain specified public interest concerns, specifically, issues of national security, media quality, plurality and standards and financial stability. In these cases, the Secretary of State may assess a merger purely on the grounds that it runs counter to the public interest.
I believe that these conditions should be extended. But even as they stand, in the case of GKN and Melrose, the takeover could potentially violate the first test on national security.
GKN has extensive military aerospace involvement, including in the Lockheed Martin - F-35 Lightning II (JSF), F-22 Raptor, Boeing – F-15 Eagle, F/A-18 Hornet, AV-8B Harrier II, Eurofighter – Typhoon, Panavia – Tornado, Saab – JAS-39 Gripen F35 and RM12 engines, and of course the new B21.
The US Government is highly likely to review any takeover via its Committee on Foreign Investment in the US. The UK has a clear interest and should do the same. The public interest test applies under the national security element of Section 58 of the 2002 Enterprise Act and the UK government has the power to consider whether the takeover is in the public interest.
On Friday 2 August 2016, the Prime Minister launched her Cabinet Committee focusing on delivering one of her government’s top three priorities – an economy that works for everyone, with a strong industrial strategy at its heart. The case of the GKN takeover provides Theresa May with a chance to prove the strength of her commitment to her self-defined mission to make a Britain a country that works for all.
Adrian Bailey is Labour MP for West Bromwich West. His Westminster Hall debate on the proposed takeover of GKN by Melrose is on Thursday 15 March
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