Carl Mortished: Corporate raiders are hovering...who is safe?

Who's next: The knives are out once again for corporate conglomerates

25 January 2018

Does the bell now toll for Guest, Keen & Nettlefolds? The name doesn’t resonate on social media; the company known today as GKN makes useful stuff — parts for aircraft and cars — and employs 6000 people in factories in the UK.

It made cannonballs during the Napoleonic wars. But for engineers, it is famous for the constant velocity joint, the thing that makes the wheels turn smoothly in a front-wheel drive car.

History is knocking on GKN’s door, but not in a good way; Melrose Industries, an ambitious corporate predator, has launched a hostile takeover bid for GKN.

Melrose has a simple agenda: slash head-office costs, sell off low-margin businesses and focus on cash generation. It’s an old game, familiar to anyone who can recall the conglomerate builders and breakers of the last two decades of the 20th century. Think Hanson and BTR and remember ICI and GEC.

The former were assembled by corporate raiders (the late Lord Hanson and Ian Strachan) and the latter were dismembered and unbundled when profits weakened and City analysts lost patience with unfocused business empires.

The knives are once again out for conglomerates.

In America, there is talk of the dismemberment of GE. The industrial empire of jet engines, locomotives and medical scanners stitched together by Jack Welch is being hounded for under-performance.

Activist investment groups are encouraging Europe’s biggest companies, venerable names such as Switzerland’s ABB, the Dutch group Philips and Siemens of Germany, to take a cold look even at their core businesses and sell the bits that don’t shine.

No one expects Melrose to put GKN on a pedestal in its boardroom, a trophy to be admired and shined periodically.

Christopher Miller, the executive chairman, once worked for Lord Hanson and the expectation is that GKN will, if the takeover succeeds, be given the old Hanson treatment: a vigorous spring clean, a round of redundancies, the supply of beans counted carefully. Then it will be driven very hard and fast for cash.

At one level, this could be just another turn in the economic cycle. We are a decade on from the great financial reckoning; boards have become lazy after years of cheap money, low inflation and easy bonuses.

Company headquarters have been reclad with new marble and the party is swinging. Even the dullest CEO can own a yacht, go to Davos, mingle with stars and perhaps grip the hand of the most extravagant and ornate business leader of all time: the President of the US.

It’s time to shake the tree, thinks the man from the land of Melrose. There are good businesses out there (such as GKN or Siemens) that generate cash but are lumbered with too much cost, research and consultancy.

Close the head office, sack a layer of management, send the PRs packing and delete the budget item called “fun stuff”.

Then, carefully pick the fruit left to rot on the branch by the former bosses, pay out a special dividend to please the greedy funds and begin again to pad those slender margins to generate more cash, money that will be needed to repay the bankers.

Fund managers do undertsand the game of corporate raid.

It returns with tedious regularity in every late boom cycle. What they don’t get is the dawn of a new kind of conglomerate.

While Siemens and its ilk fret about a Melrose sniffing at their cash flow, the really big, sprawling monster is being assembled elsewhere.

On the other side of the Atlantic, famous companies with very expensive shares are doing all the wrong things: chasing sales, ignoring profit, creating more layers of management and building prestige corporate headquarters. Worse than that, according to the conglomerate-haters, they are expanding horizontally, buying extraneous businesses to create a vast portfolio of companies supported by a technology “platform”.

Amazon was an online bookseller which then added videos, household goods, toys and music. It became a technology seller, an entertainment company, a fashion brand, a logistics provider, food delivery business and, recently, it bought a supermarket chain.

Google has gone further adrift, refashioning itself with a new corporate holding company, Alphabet, which owns not just the core search-engine business and YouTube but the so-called “moonshots”, the expensive forays into driverless cars, biotech and drones, beloved of Google founders Larry Page and Sergey Brin.

An investor can take a view as to whether Alphabet’s moonshots will one day become earthbound cash generators.

More problematic is whether the American Department of Justice will continue to turn a blind eye to the monopoly risk in the horizontal expansion of Amazon across new business sectors and markets. There may come a day when the word “platform” is viewed with the same suspicion as “conglomerate”.

Carl Mortished: Corporate raiders are hovering...who is safe?

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