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