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Melrose and GKN – the end of the UK’s manufacturing firesale?

by Heat Recruitment

The weakened Great British Pound (GBP) on the back of the Brexit vote has resulted in both positives and negatives for the UK’s economy – with engineering and manufacturing particularly affected. Following the vote, GBP dropped to the lowest levels in 31 years, sitting at $1.32 against the dollar. Speaking on the fall, Naeem Aslam, Chief Market Analyst at ThinkForex, stated: “It’s vile and ugly out there, the British pound is facing its worst day ever.”

In 2016, we saw the development of an interesting trend – foreign firms cashing in on the lowered buying power of Sterling. In fact, over £100bn was spent buying British businesses – a 313% increase on figures seen in 2015.

Famously, SoftBank took over UK technology firm Arm Holdings – the semiconductor design company – for a £24.3bn deal, and Skyscanner was purchased by Chinese travel firm Ctrip in its own £1.4bn deal.

Today, we see a continuation of this trend – although one repeatedly rebuffed. One of the UK’s largest engineering giants, GKN, has rejected takeover bids of £7bn, and more recently, £8.1bn by turnaround specialist Melrose.

Despite the increased value, GKN believes that the offers from Melrose are significantly undervalued and are a poor choice of leader for the company. GKN Chairman Mike Turner confirmed that: “Its management lacks the relevant experience and its short-term business model is inappropriate for GKN’s customers and investors.”

Speaking in support, Tom Williams, Chief Operating Officer at Airbus has now advised that “The industry does not lend itself to shorter term financial investment which naturally reduces R&D budgets and limits vital innovation … It would be practically impossible for us to give any new work to GKN under such ownership model when we don’t know who the long-term investor will be.”

Only a year ago, KPMG released research showing that the resilience of the UK’s economy, combined with the slump in GBP, would result in a 17% increase to global market capacity for mergers and acquisitions. It would mean the allure of ‘cheap’ UK companies would prove hard to resist for US and Asian firms.

Speaking on the research, Andrew Nicholson, Head of M&A at KPMG noted that: “International buyers emerged as a real force to be reckoned with towards the end of last year, as overseas trade acquirers – most notably those from the US and Asia – acted opportunistically to take advantage of a weakened sterling.”

“With no sign of a bounce in the pound on the horizon, and the UK economy continuing to confound post-referendum expectations, UK businesses will remain a target for hungry investors.”

Rebounding on the post-Brexit figures, however, GBP is today worth $1.40 against the US Dollar… still far below the 2014 peak of $1.71, but a sure step in the right direction. So, has the increased allure of these combined figures now come to a close?

The answer, curiously, is that this activity has now reversed – despite GBP not yet rallying as strongly as hoped.

According to the Office of National Statistics, inward M&A activity fell from £190bn to £35.3bn in 2017… but the acquisition of foreign targets jumped to a 17-year high – £76.6bn. (The majority of this figure was led by two major buyouts from Reckitt Benckiser, the consumer goods manufacturer, and British American Tobacco, the tobacco manufacturer.)

So why are British manufacturers and conglomerates now looking overseas? According to Thompson Reuters, outward M&A activity increased by 33% – with some experts pinning the move on companies looking for increased stability in foreign markets.

With these figures, it would seem that not only has the firesale of UK companies well and truly come to a close, but it has also hit full reverse.

If you’re looking for your next career move in the engineering and manufacturing sector, or are looking for the top talent to meet your business plans, get in touch with our dedicated team at Heat Recruitment.

By Mike Taylor