They grew by buying, why shouldn't they be bought? - Copyright GKN

Will Hutton has a column in today’s Guardian, GKN will be stripped and sold for parts by ghouls who have no interest in making things. The column, on the proposed takeover of GKN, is an attack on the Mergers-and-Acquisitions business reflecting a total lack of knowledge of it.

Miller’s is a capitalism organised entirely around extracting rather than creating value.

Listen. Garage start-up businesses innovate. Small businesses scale up and hire like crazy. The next step — in increasing efficiency — is for an established business to buy the company and figure out how to do the same job with fewer people. Finally, in the cases where the process stalls, M&A types swoop in, buy up the firm, kick out the poor managers, and guide divisions into the hands of good managers.

Value is created (or preserved) at every step of this process. And, truth be told, every step is disruptive.

No one understands what the M&A people do do, and they don’t seem to be able to explain it. Mitt Romney at Bain Capital was in this business, and a media attack on his campaign, rather more effective than the time he put the incontinent dog into a rooftop carrier for a car trip, was that he helped split up a firm and some widow got cancer and found she had no insurance, though the facts didn’t exactly match that narrative. Romney, though was as incapable of defending his past career as he was at defending his party’s platform.

Hutton faults “Thatcherite” Lord Hanson for the “deindustrialisation” of Britain, and predicts:

We can foretell what will happen to GKN. Businesses will be sold to repay the £8bn. Prices will increase, and market share will be foregone: there is no other option given the millstone of debt around Melrose’s neck. R&D will be frozen at the current levels…rendering virtually valueless the promise…to maintain it. Investment will only be allowed on Hanson-type terms – four-year paybacks and 20% returns. Yes, the company headquarters will remain in Britain – but in Mayfair, not in Redditch. In 10 years’ time, some company will buy the rump of GKN, only to find it in the same condition as Ralston Purina found Eveready.

GKN was faltering and its stock price was attractively low before the arrival of the “Thatcherite.” The “millstone of debt” and lack of market share were already present; it will require more debt to rectify the problems, but Miller and his firm will solely be on the hook for it.

The missing question is, “Compared to what?” Hutton can pine for a company, back on its way to world dominance of its industry, where R&D is fully funded, everyone gets to stay at his comfortable desk for good pay, and the headquarters can even stay in the same city. But it wasn’t going to happen, and it is not Miller’s fault.

GKN might indeed be unrecognizable in a decade, compared to its current organization. It might well not have the name GKN at all. Its workers may be doing the same jobs with the same coworkers in the same divisions that are divisions of a different company; or more competent managers may see fit to have them do jobs that need doing more.

This stuff happens, and it is a damn sight better to have an experienced hand try to salvage value from GKN, even at the expense of diverting it to new tasks, than the sugar daddy who is plowing ever more money into Sears Roebuck to have it continue to do the same thing in the same way at malls that no one visits.

Somehow, when the surgeon makes the initial incision, no one vilifies him for the leaking blood, nor claims that, in short order, the nation will be rendered completely bloodless.

 

With a hat tip to CT reader “Diogenes” who suggested this topic in a separate post

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Rhoda Klapp
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Rhoda Klapp

You mention Sears in passing. Just why are there deserted Sears shops in ghost malls all over the US? Where I lived there were a couple of top malls. There were half a dozen in various stages of decline. Once there is a top mall, if you need to get in your car to shop you might as well drive past the crap malls and go to the good one. The only people who go to the crap malls are the ones who have no choice. That’s not a model for success. Can the decline ever be reversed? Or is… Read more »

Bongo
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Bongo

Nice to see the question ‘Compared to what?’ in there. It’s not asked often enough. For Willy Hutton the comparison is to a company with a fully funded R&D division financed using the coercive power of the state, or some other law backed by force that you can’t pay a dividend unless you run things his way.

Rhoda Klapp
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Rhoda Klapp

Don’t get me wrong, I don’t want to save the ghost malls as malls, they are gone. What I don’t like is the way they won’t just die. They persist when they can’t possibly be making money. Funny how bricks-and-mortar retail just feels it has to remove value in the pursuit of low cost. It is contempt for the customer that does it. And an ignorance of the threat that implies an intentional tactic of blind eye plus crossed fingers.

Tim Newman
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Tim Newman

Or is there a way to repurpose a site which has decent parking and position but no customers? I read somewhere it’s not a bad idea, if you’re looking for office space, to rent somewhere in a declining shopping mall. It’s usually cheaper than real office space, easier to get to, and there is masses of parking. Plus you can do shopping whenever you like. On the subject of M&As, the only thing I believe should be outlawed is that daft method which the Glazers used to buy Manchester United and those other lot bought Toys R Us, whereby you… Read more »

Quentin Vole
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Quentin Vole

A neighbour has a business installing LED lighting systems. He used to have an office that was on the other side of the nearest town and a bit of a pain to get to. So he rented a local shop unit. To keep the planners happy, he’d cheerily sell you an LED bulb, but that wasn’t his purpose and he certainly didn’t advertise.

I think he did this for the convenience of the location rather than to save money.

Bloke in North Dorset
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I read somewhere it’s not a bad idea, if you’re looking for office space, to rent somewhere in a declining shopping mall. It’s usually cheaper than real office space, easier to get to, and there is masses of parking. Plus you can do shopping whenever you like. Great idea. but it runs in to the requirement for a change of use and all the costs and hassle of persuading a bureaucrat and local politicians that what you want to do is a good idea. And this being UK there’s bound to be some local opposition, if only for the sake… Read more »

Diogenes
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Diogenes

The thing that got me about the story was that Melrose were being depicted as short termist when GKN management had already flogged the driveline division to Daba, the division with the UK unionised workforce that Corbyn wants to protect!