The battle for GKN
Melrose Industries' approach for GKN was a textbook example of how to win a hostile takeover
It is exactly 30 years since Nick Miles, co-founder of financial PR consultancy Montfort Communications, first worked on the PR strategy for a contested bid, when alongside Tim, now Lord, Bell, he represented Minorca in its hostile $4.9 billion approach for South Africa’s Consolidated Gold Fields.
Minorca ultimately lost that battle. Consolidated succumbed to an approach from Hanson, but Miles has since worked on around 25 contested bids, of which he calculates ‘more than half’ were won by his clients.
Miles has just added to that tally, after Montfort’s longstanding client Melrose Industries won a bitter £8.1bn hostile bid battle for FTSE 100 engineering group GKN. It was a contest, most City commentators agreed, that GKN deserved to lose, lamenting the quality of its defence. ‘It was hopeless,’ says one. ‘GKN just seemed to be all over the place.’
There’s always a debate about how hostile should you be in a hostile
But it was also the first major hostile takeover since Cadbury capitulated to Kraft, now Mondelēz, eight years ago, and much has changed in the intervening period, with the rise of social media, activist investors and a 24/7 news cycle. This means communications ‘is much more integral to a transaction than in the past’, says Miles.
‘When I started in the City in the 80s, we were basically being asked to ‘carry a message’ to the newspapers, while the other advisers battled with the [Takeover] Panel, wooed shareholders, kept the debt markets happy and dealt with the minutiae of clearances around the world.
‘Today there is a plethora of constituents, with politicians, unions and special interest campaigners in the mix as well as activists, merger arbitrageurs, many of whom are strangers to UK rules. Broadcast and social media are on the case in a way they never were in the past. And the print and wire-based media are ‘on it’ 24/7. You can’t relax for a second.’
The key, Miles argues, is consistency – an unwavering belief in the stated strategy and never once deviating from that. It’s vital to communicate strategically, rather than simply respond to what’s coming at you – much from reporters who have never covered a hostile bid before. Then there are all the other parties that have to be satisfied: the Takeover Panel, the Government, overseas regulators.
He likens it to a football match ‘where your team runs out onto the pitch at Wembley but most of the spectators have little interest in the result – or the rules – and many aren’t even football fans. But the noise levels are enormous and the manager, sometimes even the players themselves, can’t hear each other. Everyone in the crowd has a ref’s whistle and there’s always the danger of a pitch invasion’.
It was just before Christmas that Miles learned that Melrose intended to bid for GKN, a 250-year-old business employing 58,000 people across more than 30 countries. By contrast, Melrose was formed just 15 years ago; a FTSE 100 listed investment company specialising in acquiring underperforming businesses and performing quick turnarounds and disposals.
Despite this reputation, Melrose is adamant that it is not a private equity company as it does not use financial engineering to boost returns, rather focusing on identifying operational improvements, empowering management and investing in the businesses. In the run-up to the initial approach by Melrose, preparations by Montfort and its other advisers were underpinned by ‘game theory’, which they used to devise potential scenarios and responses.
In the past, Miles says, takeover advisers would have been divided into red and blue teams, testing out each other’s strategies and responses. A strategy document covering all audiences and geographies was drawn up one week before the approach was made.
The new GKN management, while saying that the share price undervalued the company, seemed to be saying that it would change everything
‘The strategy was to look like winners from the start,’ says Miles. This was to be achieved firstly by ‘going full pelt’ with Melrose’s enviable track record, holding nothing back and not being shy in banging the drum. This was then to be reinforced by a stress on GKN’s poor recent performance.
‘There’s always a debate about how hostile should you be in a hostile,’ Miles demurs. ‘But the decision was to be ‘truthfully blunt’ about their shortcomings.’ Montfort was well aware that accusations of ‘asset stripping’ and opportunism would be levelled at Melrose and that its team needed to be ready with rebuttals.
Melrose submitted its initial approach on 8 January. Four days later, GKN announced the appointment of Anne Stevens as chief executive, alongside news of a two-year transformation programme to boost cash and profits and plans to split the business with the sale of its automotive arm to America’s Dana Corporation. Almost as an aside, its statement also confirmed it had received an approach which it was rejecting as ‘entirely opportunistic’.
The statement added: ‘This announcement is made without the consent of Melrose.’ The move surprised Miles, but it also meant that GKN had effectively gone hostile by both announcing and simultaneously rejecting Melrose’s approach without formally informing the company. The statement and later ones, although perhaps unwittingly, also appeared to vindicate Melrose’s assertion that GKN was underperforming.
‘The new GKN management, while saying that the share price undervalued the company, seemed to be saying that it would change everything,’ explains Miles. ‘Effectively, it was giving shareholders the choice between Melrose or a better GKN. It was not logical.’
The response spurred Melrose into making a formal bid without further negotiation with GKN’s management or hiking its initial offer. Miles viewed it as essential in the bid’s early days to ensure that Melrose’s track record and its management’s credibility and strong support from investors became an immediate article of faith. This task was aided by the effectiveness in communications of Melrose’s executives, he says, with the key leaders able to engage well in human terms as well as marshal convincing arguments.
Plenty of quotable vernacular helped, with comments such as This is a job interview and we are confident of winning it and references to GKN being Lions led by donkeys. GKN’s defence rhetoric, meanwhile, was focusing on the company being real engineers as opposed to Melrose’s supposedly financial ones, and on the offer’s premium over the pre-bid share price being a ‘fake premium’.
Miles sees Melrose’s straight talking as key. ‘If you’re going to ‘give quote’ in my view, you should try not to mangle words… or perhaps more importantly, facts.’ Speed is of the essence in hostile bid battles and Miles says it helped that Melrose’s advisors had worked together for several years, enabling clear work streams and very short response times.
‘Montfort’s role was clear and we were trusted to get on with it,’ he adds. ‘At Montfort, we have a very close knit M&A machine. There are no time zones and no red lines in terms of input. All Montfort staff members can – and did – input to our monitoring and assessment of media activity and comment. Market intelligence and feedback is crucial.’
If you’re going to ‘give quote’ in my view, you should try not to mangle words… or perhaps more importantly, facts
Financial journalists love takeover battles. They are usually filled with twists and turns, where one side can seem to have the edge only to temporarily lose it the following week after a bruising event or media interview. Hostile bids generate hundreds of column inches, as journalists analyse the pros and cons of a deal, seek out institutional investors for opinions and ‘kick the tyres’ of both sides. With highly competitive journalists ever on the hunt for new angles or lines to pursue, communicators must be able to filter what is important and may reverberate.
‘Our job is to identify the arguments our client will win and then focus on those,’ says Miles. ‘So our strategy was to stick to the facts because the facts would work for us, not just with financial audiences. We were helped by GKN’s ‘strategy-a-day’ approach in the latter stages of the bid, where it appeared to be flip-flopping about in a desperate attempt to secure independence. We stuck to our guns.’
Social media is a recent complicating factor. Strict regulations mean each side must stick rigorously to the key messages when engaging on Twitter. They cannot engage in conversations on social networks or challenge any misconceptions. This was not, therefore, an audience with which Melrose engaged.
‘Politicians, unions and employees tap into social media for information and journalists do look at Twitter,’ says Miles. ‘It is important not to confuse impact with influence: it does not influence investors.’ Indeed, Melrose’s Twitter account has just 51 followers and has tweeted only once – about its annual meeting back in 2015. The rise of broadcast media is somewhat more important.
‘In the past, broadcasters weren’t remotely interested in City news and takeover battles,’ says Miles. ‘It was even hard to get coverage on the Today programme. Today you have shows like Ian King Live on Sky, and other broadcasters paying more attention to the details of a deal. If I’m honest, I argued at the outset for a higher profile in certain areas, particularly broadcast, than the team would agree to. Interestingly, the GKN camp also didn’t go down the broadcast route.’
Our strategy was to stick to the facts because the facts would work for us, not just with financial audiences. We were helped by GKN’s ‘strategy-a-day’ approach in the latter stages of the bid
Despite a relentless media circus inevitably developing, Miles insists that the old rules still applied and that Melrose should focus on communicating to those outlets, predominantly traditional media, with influence and leverage. ‘It means that, if messages land, you know they have landed,’ he says.
A major test of this conviction came when Unite, Britain’s largest trade union, issued a damning statement that it had ‘no confidence’ in Melrose after the hostile bidder refused to offer guarantees on GKN jobs, skills and investment. Its announcement came just days after Airbus, GKN’s biggest client, accounting for 20 per cent of its aerospace’s business, claimed that it would be ‘practically impossible’ to give the company any new work should Melrose succeed.
Airbus claimed Melrose’s strategy was inherently short-term whereas GKN operated in an industry requiring long-term investment and strategic insight. Airbus’ comments were seized upon by GKN’s chairman Mike Turner as evidence that Melrose was not an ‘appropriate owner’.
The two interventions were taken by Montfort in turn. ‘We took the Unite campaign very seriously,’ recalls Miles. ‘It was disappointing they were able to spout so many inaccuracies and ignore so many of the facts… and get something of a hearing in the mainstream media. But the union was just not interested in listening to us.’ He concedes that, for at least 24 hours, Unite’s claim ‘was used as a stick to beat us with, it dominated the rolling news agenda and it wasn’t even true’.
‘In our view it would have been hopeless to run down that alley, although of course there was engagement,’ he adds. ‘I think most commentators tired of the posturing and the tub-thumping.’ Airbus’s comments were interpreted by the media as being potentially much more decisive and Miles concedes that they came ‘out-of-the-blue’. Another surprise was an announcement from GKN’s major shareholder Columbia Threadneedle that it supported the incumbent management, which was at odds with its support for the bid at Melrose’s extraordinary meeting.
It’s an in-joke, don’t talk about pensions to journalists because they just aren’t interested
At moments like this, morale can suffer, Miles admits, but the communications team had to stick to the agreed strategy, while lifting spirits in the camp through changes in tone and mood, taking broader views on some of the issues and ‘raising eyes away from the immediate problem’. Melrose also had some surprise aces of its own to serve.
Shortly after GKN criticised Melrose for not agreeing a pensions deal with the trustees of its £3.3 billion scheme, Melrose confirmed that a deal had been agreed where it would contribute up to £1 billion should the takeover go ahead. ‘It’s an in-joke, don’t talk about pensions to journalists because they just aren’t interested,’ explains Miles, perhaps why the news came as a surprise.
‘He’s right,’ admits one financial journalist. ‘Pensions are just so boring and hard to explain, even if they do play an important role in a takeover.’
Melrose and Montfort’s approach ended up easily winning the day, though key observers concluded that a retraction demanded by the Takeover Panel and miscommunication even extending to the date of Ms Stevens’ birthday combined with strategy errors such as the break-up made GKN appear much the riskier horse to back. ‘Despite her rapid break-up plans, Ms Stevens keeps pretending she’s some long-term saviour of the business,’ wrote Alistair Osborne, chief business commentator at The Times, in a scathing leader. ‘Like her weekend comments, that really is fake news.’
Neil Collins, columnist at the Financial Times, went even further, stating that GKN’s ‘extraordinary’ defence ‘sneered at the opposition, conjured up a deal to sell two-thirds of the business to a foreign company with a dodgy record and changed tack more often than a boat in an America’s Cup race.’
This was a takeover bid that ended up looking like plain sailing.