They grew by buying, why shouldn't they be bought?

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

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12 COMMENTS

  1. You mention Sears in passing. Just why are there deserted Sears shops in ghost malls all over the US? Where I lived there were a couple of top malls. There were half a dozen in various stages of decline. Once there is a top mall, if you need to get in your car to shop you might as well drive past the crap malls and go to the good one. The only people who go to the crap malls are the ones who have no choice. That’s not a model for success. Can the decline ever be reversed? Or is there a way to repurpose a site which has decent parking and position but no customers?

  2. Of course there is a way to repurpose a site; that is to bulldoze it and build the next thing that the customers want. Progress cannot and ought not be reversed, and is not “decline” except to those who don’t want it. And, after decades of serving customers, it is surprisingly affordable to tear it down and put up something new.

    When I was young, the city got a state-of-the-art mall, 30 stores and 3 anchor stores, essentially three strip malls in a figure-L with a roofed courtyard, and easy expressway access. The fashionable chain stores came to it and there were predictions that it would ruin downtown. Twenty years later, a modern mall went up, off a different expressway, totally indoor with 180 stores and its own ambiance. Twenty more years and I am at a keyboard buying slacks that fit me without alteration, which you couldn’t do at either mall. (Also corresponding to people across the ocean without waiting for the post!) Back in Michigan, downtown is still going strong, though you need to plan to get five things done because traffic is a chore and you’ll pay to park. Your own post contains the reason for the decline: Everything else advanced.

  3. PS – You know, Sears itself was threatening, offering small-town farmers merchandise from a huge catalog with which no one on Main Street could compete, 24/7 using an outlandish device called the telephone. When you got something no one in town could get, everyone wanted to know where you found it. From a stranger, but Sears realized it needed unquestioned trust and a reputation for delivering honest value.

    Go there now, and every piece of “fashion” has a price tag with a dishonest price from which it claims it is marked down. At the cash register, the cashier gives you four stages of badgering for personal information. Like when Radio Shack got rid of its expert technicians for lower-cost people who were better at pushing batteries after the sale. Honest value moved to Walmart, though it shows signs of forgetting that.

  4. Nice to see the question ‘Compared to what?’ in there. It’s not asked often enough. For Willy Hutton the comparison is to a company with a fully funded R&D division financed using the coercive power of the state, or some other law backed by force that you can’t pay a dividend unless you run things his way.

  5. Don’t get me wrong, I don’t want to save the ghost malls as malls, they are gone. What I don’t like is the way they won’t just die. They persist when they can’t possibly be making money. Funny how bricks-and-mortar retail just feels it has to remove value in the pursuit of low cost. It is contempt for the customer that does it. And an ignorance of the threat that implies an intentional tactic of blind eye plus crossed fingers.

    • Businesses do not just stubbornly “persist when they can’t possibly be making money.” Even the deserted Lilac City Mall is making money, and not by harvesting the dandelion crop in the cracks in the asphalt; otherwise, its only remaining anchor store, Kmart, would have made this one of the hundreds of stores they shut. Small-town radio stations and unaffiliated baseball clubs are an exception that owe to vanity.

      There are retailers in retailing, and they know better than to have “contempt for the customer.” But there are also Business School types, like the guys in Fort Worth who knew how to run Radio Shack stores by writing the perfect rulebook, ignoring or discarding their expertise in each city.

  6. Or is there a way to repurpose a site which has decent parking and position but no customers?

    I read somewhere it’s not a bad idea, if you’re looking for office space, to rent somewhere in a declining shopping mall. It’s usually cheaper than real office space, easier to get to, and there is masses of parking. Plus you can do shopping whenever you like.

    On the subject of M&As, the only thing I believe should be outlawed is that daft method which the Glazers used to buy Manchester United and those other lot bought Toys R Us, whereby you borrow money to buy a company and then immediately shift the debt onto the company, and spend damned near everything the company makes on interest thereafter. Granted the Glazers have done an excellent job with Man Utd, but I’ve always thought something smelled wrong about being able to buy a company without actually having any money of your own, nor incurring debt yourself.

    • An office in a shopping mall is a great idea. “Incubators,” office complexes designed to temporarily house start-up businesses, are real estate along the same lines, but why not reuse what’s there? The Zoning Board would have no basis for complaining, nor the mall owners, provided you maintained the storefront to suggest that it was in active use despite not welcoming customers, versus putting plywood over the windows.

      Now, even in leveraged buyouts, the capital belongs to someone, who must be convinced to let you use it. The hope (even when based on nothing) is to be able to revive the business without cutting other people in via an issuance of new shares. Wringing money out of a business then discarding it is a popular Narrative but achieving a sustainable business is always more lucrative. This despite U.S. tax provisions that ease the burden on the failing, which subsidize failure.

      “Buy a company without actually having any money of your own” — You’ve got to have something of your own, you’ve got to bring something to the table, such as a successful history in reorgs, to get lenders and existing owners to go along with you.

    • A neighbour has a business installing LED lighting systems. He used to have an office that was on the other side of the nearest town and a bit of a pain to get to. So he rented a local shop unit. To keep the planners happy, he’d cheerily sell you an LED bulb, but that wasn’t his purpose and he certainly didn’t advertise.

      I think he did this for the convenience of the location rather than to save money.

  7. I read somewhere it’s not a bad idea, if you’re looking for office space, to rent somewhere in a declining shopping mall. It’s usually cheaper than real office space, easier to get to, and there is masses of parking. Plus you can do shopping whenever you like.

    Great idea. but it runs in to the requirement for a change of use and all the costs and hassle of persuading a bureaucrat and local politicians that what you want to do is a good idea. And this being UK there’s bound to be some local opposition, if only for the sake of opposing, another cost.

    We’re back to blowing up the Town and Country Planning Act and letting the market decide.

    • I implied above that it would be easier in the U.S., but I don’t know that that’s still the case. Used to be that a “less intensive use” of a property than it was zoned for was allowed (and the least intensive use, farming, could be done anywhere, lest suburbanites outvote pig farmers and everyone starve). But that was decades ago. Yes, blow it up.

  8. The thing that got me about the story was that Melrose were being depicted as short termist when GKN management had already flogged the driveline division to Daba, the division with the UK unionised workforce that Corbyn wants to protect!