Britain’s feeble takeover rules need urgent reform, critics warned last night after short-term speculators who forced the takeover of GKN made an instant profit of £172million.
Hedge funds snapped up 25 per cent of the defence firm’s shares in the weeks before yesterday’s vote, giving them voting rights on the deal and the prospect of a quick profit if they pushed it through.
Their votes helped Melrose get the backing of investors holding 52.43 per cent of GKN stock in yesterday’s vote. Without support from the hedge funds, the bid would have failed and GKN’s future as an independent firm would have been secured.
The result sent shares in GKN up 9.5 per cent, or 40p, to 463p – giving the hedge funds a profit of £172million.
Britain’s feeble takeover rules need urgent reform, critics warned last night after short-term speculators who forced the takeover of GKN made an instant profit of £172million
They are understood to control 25 per cent of GKN’s 1.72billion shares – or 430million.
The New York hedge fund Elliott banked £26million having bought enough shares during the fight to make it GKN’s second biggest investor.
But it is understood that while hedge funds such as Elliott voted in favour of the takeover, two-thirds of GKN’s long-term investors were opposed.
Sir Richard Lapthorne, who wrote a Government report into Britain’s manufacturing industry in 2013, said: ‘These rules need rewriting. The hollowing out of the British industrial base has gone too far.’
Tory MP Lucy Allan said: ‘What we are seeing is the future of a great British manufacturing company being decided by short-term-value investors.
‘These investors, or vulture funds, came on to the GKN share register for a matter of weeks to make a quick and significant profit, and it is they who have decided the future of this great British company. There are few who would condone this.
‘If good is to come from this, it will be reform of the Takeover Code, preventing new investors from participating in a vote to decide the long-term future of a company such as GKN.’
Following the hostile takeover of Cadbury by US giant Kraft in 2010, former Cadbury chairman Sir Roger Carr called for an overhaul of the rules.
He called for voting rights to be removed from shares bought during a takeover, meaning only those who owned shares before it started could vote on its outcome.
It has also been suggested that investors should hold shares for six months before they can vote on such decisions, which would have diluted the influence of edge funds in the GKN deal.
Labour MP Jack Dromey said if such rules had been in place ‘this would not have happened’, adding: ‘Takeover rules are in desperate need of reform.
‘Yet again we have seen a jewel in the crown of British industry sold because its shares were bought up by hedge funds. To let a British engineering icon like GKN be taken over by a short-termist, asset stripper like Melrose is a monumental failure by ministers.’
Hedge funds snapped up stock after Melrose launched its raid on GKN in January, hoping to rake in money by forcing the takeover through
Former business secretary Sir Vince Cable said: ‘This has highlighted the weakness of the national interest test under the takeover rules. Our rules are too lax. They allow takeovers that are contrary to the national interest.’
Hedge funds snapped up stock after Melrose launched its raid on GKN in January, hoping to rake in money by forcing the takeover through.
The vultures will get cash and shares in Melrose once the deal is completed and are likely to sell up within weeks.
But it wasn’t only hedge funds that waved the takeover through.
In an unusual move, Legal & General Investment Management (LGIM), which handles almost £1trillion of savers’ money, is thought to have put its 2.63 per cent stake behind Melrose.
As a passive investor, LGIM is meant to track the market rather than try to back successful businesses.
Unions also called for an overhaul of the takeover rules.
Steve Turner, from Unite, said: ‘We need an overhaul of takeover laws to ensure other British companies do not fall prey to corporate vultures looking to make a quick buck against the national interest.’