Melrose / GKN battle continues

Quite a lot of news on the Melrose bid for GKN today.

Unite, which is campaigning strongly against the bid, held a rally and series of meetings at parliament. It is pleasing to see that a lot of Labour MPs are speaking out against the bid too, and it is also attracting scrutiny from the BEIS committee.

As usual, my eye is drawn to what is going on regarding the ownership of the companies involved. On that point, today we've seen two proxy adviser recommendations become public. On the one hand, ISS has come out and given Melrose the thumbs up. According to Reuters, ISS is quite chirpy about it:

“Given the sensible strategic rationale, (Melrose‘s) turnaround track record and reasonable valuation, approval of the acquisition is warranted,” ISS said in a note circulated to clients last week.

On the other, PIRC has come out against the deal:

PIRC has highlighted to investors that Melrose’s decision to go hostile means that it “has not benefited from the co-operation of the GKN board”.
The adviser also said that “significant political and other considerations, including security concerns” have been raised and that Melrose has reported annual losses two years running.

Meanwhile.... speculators gonna speculate. Following up on my last blog, I've been keeping an eye on the total disclosed short position in Melrose. And they've gone up to 11.67%. From a quick skim I think that makes Melrose the 3rd most shorted UK stock in the FCA list currently, after Provident Financial and Debenhams. What is really noticeable is the position held by Davidson Kempner, which has shot up over the past month or so and now stands at 2.46%. Elliott Capital has also built up a position quickly, now at 1.7%. 

I have little doubt that a number of those shorting Melrose are also taking corresponding long positions in GKN. I think the disclosures from the like of HSBC, Bank of America and (more recently) Goldman Sachs probably relate to underlying investors building up an economic interest in GKN, in some cases through derivatives.  

I know M&A arbitrage is a fact of life these days, but it makes me wonder what we should be doing with the takeover rules. I don't believe these sorts of investors have any long-term interest in either GKN or Melrose, they are just trying to skim value off the process of the deal and its likely impact on the values of the shares of each. Yet the deal itself will have an impact - in fact already is having an impact - on the lives of thousands of GKN workers. It seems nuts that we prioritise the interests of the speculators.

Finally, I think there is an important link here with "stewardship". After all, surely one of the genuinely important roles an investor has is influencing the change of ownership of a company. So I thought I'd have a look for Stewardship Code statements for some of investors that are in the mix. 

Here are a few bits from the statement from AQR Capital (which is short Melrose, long GKN) says:

From the introduction 

The Firm uses quantitative tools in a systematic process to build diversified and risk-controlled portfolios. The process does not typically involve subjective assessments of underlying companies or direct contact with the companies in which it invests.  

In relation to principle 3 

AQR’s investment approach, as a quantitative investment manager, is systematic and does not typically involve subjective assessments of underlying companies. AQR’s proprietary quantitative systems analyse various factors, combining them with estimates of transaction costs to arrive at daily investment decisions. All investment decisions are generated by AQR’s quantitative systems, other than in rare instances where the Risk Management Committee deems the circumstances to be exceptional. AQR does not invest in companies with a view to actively intervening in their management. 

I think the firm is pretty straight up about what it does and does not do. What is more, I found the statement very easily.

However I can't find a Stewardship Code statement for Empyrean Capital, and the Davidson Kempner statement (which took some finding) contains some of the cut and paste text to explain non-compliance that I blogged about previously:

The Firm pursues a multi-strategy investment approach, investing in strategies including distressed, event driven and equity long/short, merger arbitrage and convertible/volatility some of which will involve investments in global equities, including UK equities. The Code is therefore relevant to only some aspects of the Firm's trading. While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The Firm invests in a variety of asset classes and in a variety of jurisdictions globally and its approach in relation to the engagement with issuers and their management is therefore determined globally, on a group-wide basis, and will often vary on a case by case basis. That being the case, the Firm does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction or asset class.

In fact the text used by Davidson Kempner is very similar indeed to that used by Elliott:

The Firm pursues a multi-strategy investment approach, including strategies that involve investing in global equities, including UK equities. The Code is therefore only relevant to some aspects of the Firm's trading. While the Firm generally supports the objectives that underlie the Code, the Firm has chosen not to commit to the Code. The Firm invests in a variety of asset classes and in a variety of jurisdictions. The approach/policies of the Firm in relation to engagement with issuers and their management are therefore determined globally, on a group wide basis. The Firm takes a consistent global approach to engagement with issuers and their management in all of the jurisdictions in which it invests and, consequently, does not consider it appropriate to commit to any particular voluntary code of practice relating to any individual jurisdiction.

I guess this is what ownership and stewardship looks like in modern capital markets: generic blurb in regulatory disclosures.