The £7bn rejection letter - and the business of valuation
Some interesting news to start the new year in Mergers & Acquisitions. The board at GKN, a FTSE 100 business, and one of the UK’s biggest engineering firms, has roundly rejected an unsolicited £7bn offer from an interested acquirer.
The bidder is Melrose plc, which specialises in the acquisition and performance improvement of manufacturing businesses. The language coming from GKN is pretty clear: Melrose’s proposed offer (at £4.05p a share) is “entirely opportunistic [and] fundamentally undervalues the Company and its prospects.”
GKN is a business of size, scale, and expertise. First founded in 1759, GKN has 58,000 employees, and posted £8.8bn revenues in 2016. But there are other factors – including a profits warning following issues in the aerospace division – that may have prompted Melrose’s decision to make a cheeky bid.
GKN, though, remains resolute, and the board’s reasoning applies just as much to owners of smaller privately owned businesses, as it does to a huge plc. Here’s what they have to say: “The Proposal would materially dilute the exposure of GKN shareholders to the meaningful upside opportunities that the Board believes are present within the Company.”
In English, this means that the £7bn offer doesn’t take into account the company’s many positive characteristics, and its strong future potential. This is something we’ve been saying at BCMS for years – the true value of a company is not in its past or even current performance; but in the opportunities going forward.
The impact of competition
There’s another unspoken theme here: competition, or lack of it. A worst-case scenario for any business is to have just one bidder in the frame, because it is that bidder who has control over the terms and momentum of any proposed deal.
We represent clients who have received similarly unsolicited offers. Like the board at GKN, our clients’ heads are not necessarily turned by these initial offers, but they do get them thinking. Is the offer realistic? Is this the best price I’m going to get? If these guys are interested, will anyone else be?
It’s at this point that an M&A advisor can really add value, by profiling other potential acquirers, creating a competitive environment, regaining control of any sale process, managing timeframes, and creating what the teams here like to call ‘deal heat’ – a genuine market around the opportunity that the sale of a business represents.
And it’s here, with more than one bidder in the frame, that the valuations can change dramatically. With BCMS clients, it’s amazing how often that first opportunistic offer is revised upwards (and upwards again!) in the face of other competing acquirers. Equally, that first bidder often falls by the wayside, and another bidder altogether emerges as the successful buyer.
Back to GKN. Melrose may come back of course (under takeover rules they have until 9 February to make a formal offer, or withdraw). But Lib Dem leader Vince Cable has already urged the Business Secretary to stop any deal happening. His language is revealing, too: "GKN stands for long term investment in advanced manufacturing whereas Melrose are in the business of short-term financial engineering."
The ‘fit’ is important. When selling a business, it’s not just about finding any buyer. It’s about finding the right buyer, and one who can drive the company on to bigger, better things.