New study finds
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.
• 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 per cent 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 Julian 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.”