The recent purchase of GKN has sparked much controversy, with
many calling for the Government to intervene by blocking the deal
altogether, or at least forcing Melrose to make additional
commitments on jobs and divestment plans. But this is not a
matter for public policy and further interference would be
counter-productive.
A new
briefing from the Institute of Economic Affairs makes
the case that shareholders, not politicians, should decide how to
run their businesses as they have the most at stake. Preventing
them from doing so could not only harm their interests, but those
of the company’s employees, customers, and even the wider
economy.
In the case of GKN, Melrose have been accused of 'short-termism'.
But this does not stand up to scrutiny as existing GKN
shareholders are being offered shares in Melrose as well as cash.
This means they will have an interest in making Melrose’s running
of GKN a success. Furthermore, the only certain way to maximise
shareholder value is actually to improve its long-term
performance.
Key points:
• GKN is not a special case that needs
extra protection from the government – much has
been made of GKN’s British heritage, but in reality only 10% of
their employees now work in the UK and the company describes
itself as a global business.
• Melrose’s business model and
objectives are perfectly legitimate – the existing
GKN management team themselves intended to ‘break up the
business’ in order to maximise shareholder value for the good of
all those with a stake in the success of the company.
• This is not
‘short-termism’ – GKN shareholders are being
offered shares in Melrose as well as cash, so they will want
Melrose to make a success of running GKN. Even if a shareholder
wanted to exit completely, the next purchaser will presumably
also want to see GKN thrive in order to realise a decent return
on their investment.
• The real ‘short-termism’ is the
political pressure to protect companies from unsettling changes
– by removing the threat of takeover you
immediately remove the incentive for poorly managed companies to
improve the performance of their business as competitive
pressures are significantly weakened.
• A protectionist approach has
implications for the wider economy - investors need
to know that they can buy and sell freely if they are going to
choose to put their money to work in the UK.
Commenting on the report, author and Chief Economist at
the Institute of Economic Affairs Jessop, said:
“There is nothing patriotic about preventing the shareholders
of British companies from deciding the best way to improve the
performance of the businesses they own. This is ultimately in the
best interests of employees, customers and the wider economy
too.
“Even if the conditions imposed so far on the Melrose takeover
are not too onerous, the government is dictating business
strategy to a private company. This is something that should make
us all feel uncomfortable.”
