INTERVIEW: The stock markets need predators like us, says Melrose boss Simon Peckham as he hits back over criticism of hostile GKN takeover
When engineering group Melrose took over GKN in 2018 in a £7 billion deal, it was the biggest and most bitterly-contested hostile bid in Britain since Cadbury was bought by Kraft.
Simon Peckham, the Melrose chief executive, was painted as a Geordie version of Gordon Gekko, the archetypal asset-stripper played by Michael Douglas in the Wall Street films.
A lawyer by training from Newcastle upon Tyne, he doesn’t bear much resemblance to the stereotype.
But Peckham was unapologetic then about Melrose’s activities, and he remains unapologetic now.
He says the stock market needs companies like Melrose to prowl the markets for prey, otherwise badly-run businesses – like the old GKN which supplied cannonballs to the British Army during the Napoleonic Wars – will just carry on underperforming.
‘I appreciate we aren’t always universally popular but you do need predators,’ he says. ‘It is very difficult to unseat management teams unless there is a catalyst like a bid.’
In theory, he says, ‘Melrose shouldn’t exist’. In a world where all companies were well run, there would be no opportunities for people like him. As it is, there is no shortage.
The business model is straightforward – buy, improve, sell. It’s a formula that has worked pretty well to date. Melrose bought a string of businesses before the GKN deal – McKechnie/Dynacast, FKI, Elster and Nortek – and put them through the treatment.
Peckham denies he and his colleagues are slash and burn merchants. ‘We are big investors in businesses. We have put over £1 billion into GKN Aerospace,’ he says. ‘We love buying businesses and seeing them get better.’
Love it or loathe it, Melrose has done well for investors who have been in from the beginning two decades ago. Its shares have risen nearly 800 per cent, it has returned £5.5 billion of cash to shareholders and spent around £1.2 billion on research and development.
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Total shareholder returns since 2005, when it made its first acquisition, are 1,700 per cent – ten times higher than the FTSE 100 index.
Peckham and his fellow founders have made a lot of money. He has received around £50 million in the past decade, £42 million of it for 2017 when a long-term, performance-related share plan bore fruit.
‘We do get paid well when we have performed. We also don’t get paid when it wouldn’t be right. I am not a non dom. It is all subject to UK income tax. I was born in the UK and I will die in the UK.’
In April this year, he span off GKN’s automotive business as a separate company called Dowlais – a £1.75 billion operation which supplies 90 per cent of the world’s vehicle manufacturers and is a leader in drive systems.
Melrose itself, currently valued at £6.66 billion, is focusing on what was the GKN Aerospace business, which supplies airframe structures and engine components for the likes of Airbus.
Peckham says there is about ‘another 12 months of hard work’ left to spruce it up.
‘If we got the right approach for it, we would sell at the right price. If that doesn’t happen, we will continue to develop it and create a major UK premium aerospace business,’ he says.
The past few years have been tough ones.
Shortly after the GKN deal, Covid struck, hitting aviation and automotive. Then came the war in Ukraine.
In the dark days of the pandemic, shares tanked – they are down by a third over the past five years – losses ballooned, the divi was cancelled and stinging job cuts were announced.
But the tide has turned. In its first update after the Dowlais demerger, Melrose said it expects sales of between £3.35 billion and £3.45 billion this year, with profits of £340 million to £350 million.
‘We have two first class engineering businesses that are run much better than when we bought them. I don’t have any embarrassment about saying Melrose has been a very good thing for GKN.
‘Had I known Covid was coming, I would have waited a year or two to buy GKN when it would have been a lot cheaper, but we would always have wanted the assets.’
Whilst grappling with GKN, Peckham was diagnosed with prostate cancer in a routine screening. Fortunately, it was detected early and treated successfully.
‘I am a very lucky man. You never quite know what life brings. As far as I know, two years later I am fine. It was a scary few weeks and months and it changes the way you think a bit. I would say to men in their fifties, get checked out.’
He speaks fondly of the early days at Melrose. ‘When we started in 2003 there were just five of us,’ he says.
They were the three founders: David Roper, now retired, who was chief executive before Peckham, executive vice-chairman Chris Miller and Peckham himself, plus the first two employees, Irene Merchant and Alistair Peart, both of whom are now retired.
Merchant was the group PA and office manager and Peart was the chief number-cruncher and search guru. ‘All ideas and targets went through his lens’, Peckham says.
‘One of my favourite Christmas parties of all time was the first one where there were literally just the five of us. I wish I could remember where we had it, but it was too good a party.’
Melrose is the nearest thing left on the UK stock market to the original corporate raiders of the 1980s – Lord Hanson and his ilk.
‘Yes, Melrose is the only incarnation,’ Peckham says. ‘Hopefully we are not dinosaurs.’
He jibes at the phrase ‘end of an era’ but he concedes that an ‘inflexion point’ has been reached with no more deals planned. So what next?
At 60, he’s not ready to head to the Dunraidin’ Retirement Home. ‘I am going to do it all again,’ he says.
Peckham has been a defender of the London stock market, choosing to list Dowlais here.
But he is concerned that both of the main political parties have lost sight of the importance of wealth creation in their zeal to raise the tax haul.
‘Government should not take for granted the wealth creators. You should try to make the cake as big as possible, then you can debate how to divide the cake. But if you haven’t got a cake, you will starve.’
As for Melrose’s own recipe for wealth creation, the ‘buy, improve, sell’ formula hatched two decades ago is deceptively simple. The buy and sell bits are obvious – although it is not always easy to get the right assets at a good price – but how does he go about the ‘improve’ part?
‘What we did with GKN was very simple,’ he adds. ‘There were a number of peripheral activities and smaller businesses, so we stopped doing that.
‘People hadn’t been taking the tough decisions, but we do take the tough decisions. We try to make simple decisions, as quickly as possible. We are here to make money. If we are not making money we will not have the cash to invest and the businesses will be on a one-way trip to oblivion.’
He mentions, admiringly, the US manufacturing company Danaher, which has a business system based on the Japanese philosophy of kaizen, or continuous improvement.
‘We don’t have a system like that, but 90 per cent of what we do is the same in all the companies we have run – trying to put power in the hands of people who can make a difference.
‘I have enormous regard for people who run businesses. We are just bureaucrats. We take existing businesses and we run them better. We are good at what we do, but that is what we are.’
So how do companies avoid being taken over by the likes of Melrose? ‘Well, if you haven’t got a product people want, or if you don’t deliver on time, and don’t charge the appropriate price, then in the long run you will meet someone like us.’
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