Let’s open our arms to hostile corporate raiders
An Eighties fashion is coming back in, says Matthew Lynn. We should welcome the shake-up.
An Eighties fashion is coming back in. We should welcome the shake-up.
A bitter takeover battle between an audacious corporate raider and an old established industrial name. Bids and counter-bids, and a war of words fought through the pages of the business press. Politicians calling for a national treasure to be protected. Add in some Human League songs, and the bid for aerospace-parts firm GKN by Melrose could be right out of the 1980s.
In many ways, this is a classic hostile raid. A small, aggressive business wants to take control of an old industrial conglomerate by persuading shareholders it can manage the assets more effectively. It is the kind of stunt that firms such as Hanson and BTR pulled all through that decade, often with stunning success. Melrose, which was only formed in 2003, is very much out of that mould.
Not much missed
In the last two decades the hostile raid has been about as fashionable as shoulder pads. Bids and deals were mostly agreed mergers in similar industries, or management buy-outs backed by private-equity houses, or straightforward acquisitions of medium-sized businesses by far larger ones. We have seen activist investors, who build a substantial stake, then demand changes in the way a company is run. But there have been few who were willing to stake billions on being able to run a business better.
Nobody much missed the raiders. They provided lots of great stories for business journalists (always a good thing). But they ended up with a bad reputation for short-term profiteering rather than long-term wealth creation.
And yet, this might be the moment for their return. Why? Because today there are plenty of companies that need the kind of pressure that hostile raiders exert. The methods were brutal, and the costs often excessive, but there was a kernel of truth to the arguments the raiders of the 1980s deployed. There were lots of big companies with assets that were underperforming, management teams that had grown complacent, and with strategies that had fallen behind the times.
Shareholders might have exerted some pressure behind the scenes, but that could often be swatted away, and very few had the time, knowledge or focus to force a business to make radical changes. It took an actual offer to make that happen. There can be no question that by the end of the decade the pressure from corporate raiders had made British and American industry leaner, more effective, and more profitable.
No shortage of targets
Look at GKN. It has just about admitted that its combination of businesses didn't make much sense. But it took the pressure of the Melrose bid to force it to make some changes. Regardless of whether the offer succeeds or not, it has already worked for shareholders.
As for other examples, drug giant GlaxoSmithKline has been drifting for years, with few new blockbuster drugs. WPP looks to have run out of steam under Martin Sorrell, with a model built for a pre-internet era. IAG has let its British Airways brand decline to the point where many lucrative business-class passengers actively avoid it.
Pearson's decision to get out of consumer media and bet big on education increasingly looks like a huge mistake that is destroying value on an epic scale. Barclays seems to stumble from crisis to crisis, changing CEOs along the way, but without making any fundamental changes to improve its performance. M&S can't seem to work out how to sell fashionable clothes any more.
At all those companies, it might well be time for a break-up, or for a radical change of management. If a hostile raid is the only way that can be achieved, it might do the FTSE a lot of good to see a few more.