In trying to fend off the hostile takeover bid by Melrose, GKN has published both its forward strategy document and its formal defence.

Both will be crucial in determining the firm's future - along with a decision by Business Secretary Greg Clark on whether to intervene or not on national security grounds (no news on that as yet).

In setting out its forward strategy, dubbed 'Moving GKN To A World Class Financial Performance', the board has set out how it hopes to keep shareholders loyal and stop them from selling out to Melrose.

That plan includes returning as much as £2.5 billion to shareholders under the previously announced 'Project Boost' improvement programme.

The forward strategy confirms that GKN is aiming to target substantial cash returns to shareholders over three years, with a "significant" chunk of this coming from divestments over the first 12 to 18 months, likely to include offloading its powder metallurgy division.

GKN also stated that its dividend policy until 2020 will aim to deliver an average payout of 50 per cent of free cash flow.

Shareholders now have a choice between what Melrose and current GKN management are offering.

On balance, I think GKN have come up with a plan that shareholders could back as Melrose's terms are not actually any better than GKN's new forward strategy.

By way of explanation, note that GKN had a value of £6.5 billion before Melrose's attack.

Let's say that both Melrose and GKN management could raise that by 25 per cent (not unrealistic), giving the firm a market value of £8.1 billion.

After deducting net debt, that gives a still-independent GKN a value of £7.2 billion.

What would that be worth to shareholders in a combined Melrose-GKN after takeover?

Bloomberg does a useful calculation on this: "A combined company would be worth £12.9 billion, with an equity value of £10.1 billion.

"GKN shareholders are being offered a 57 per cent plus £1.4 billion - about £7.2 billion as well."

But the key point - as Bloomberg notes - is as follows: "If GKN's improvement goes further, the economics tilt in favor of independence - as GKN shareholders would keep 100 per cent of the upside."

This is a fairly static analysis and I've noted before in blogs on the Birmingham Post that shareholders might also better recognise the importance of GKN's long-run investment in new technologies that will be needed in the future.

Think of the eDrive technology needed in electric cars.

That could offer a potential upside that would be lost in Melrose's "buy-improve-sell" approach that could see GKN dismembered and sold on within five years.

Now, I do have concerns about GKN management's new focus on generating cash to keep shareholders on board and to what extent this will affect the ability of GKN to continue investing long term.

Also, as I've noted before, there is an issue over selling off divisions as that in turn will make the firm smaller and hence more vulnerable to takeover down the line.

And yet. What GKN is offering is far more palatable for shareholder and indeed wider stakeholders – including workers – than the hostile bid by Melrose which is pretty much a leap into the dark.

The latter is a private equity style approach, involving buying on the cheap when a firm has taken a hit (as GKN has done with is US operations), restructuring (think job cuts), asset disposals to raise cash, and then disappearing before the long run impact on competitiveness and R&D becomes clear.

Oh, and there's no guarantee of success - think of Melrose's ongoing inability to turn around the engineering firm Brush, where is has just announced further job cuts.

As the highly respected analyst Howard Wheeldon notes: "What so often happens next in these situations, if they are successful, is the buying company effectively assets strips without showing any concern to long term working capital and investment requirement and then, with luck and a fair wind, disposes of the company or parts of it before they then almost inevitably fall on hard times.

"In the process, borrowings in the company in question have been significantly raised before the company is disposed."


In its formal defence document, GKN went further in criticising Melrose's ability to develop the business: "There is no evidence that management has relationships with key customers such as Airbus, Boeing, Fiat Chrysler, Ford and VW.

"Furthermore, Melrose's stated three-to-five-year exit strategy is not compatible with the long-term investment and technology horizons that are essential in GKN's markets.

"Cars and aircraft are researched, designed, produced and serviced over several decades - your board believes that a short-term, private equity-style strategy is not the right way to provide sustained shareholder value in our sectors."

GKN management also criticises the "private equity-style" strategy it says Melrose will use to overhaul the company, characterising the "short-term business model” as "inappropriate for GKN".

As I've noted before, GKN is not in a turnaround situation and it is highly questionable as to whether Melrose anyway has the ability to offer anything over and above GKN management.

The bottom line is that, unlike some of the companies that Melrose has previously acquired, GKN is not a recovery situation.

GKN shareholders risk a leap in the dark with Melrose, with more upside potential with GKN management.

Prof David Bailey works at Aston Business School in Birmingham