When we looked at Dowlais Group’s (DWL) annual figures, it brought home why the decision was taken to cleave the automotive business away from Melrose Industries (MRO). The much-touted turnaround specialist fell to an operating loss due to a goodwill impairment linked to the carrying value of its powder metallurgy division. But it wasn’t so much the loss in isolation, but the realisation of the managerial challenge posed by Melrose’s original £8.1bn acquisition of the GKN engineering group in 2018.
Melrose was not a conglomerate in the strictest sense, but its experience with GKN ties in with the narrative that more focused companies tend to perform better. Yet when you look at an organisation such as, say, Amazon (US:AMZN), you’re left with the impression that the conglomerate model may be evolving rather than disappearing altogether.
Melrose inherited around £629mn-worth of lossmaking contracts when the deal was struck, but what management couldn’t have foreseen was the strain on automotive supply chains brought about by a global semiconductor shortage, to say nothing of the grounding of civil aviation fleets in response to the pandemic. It’s notoriously difficult to fight a war on two fronts, but Melrose, which had established a reputation for unlocking cash from acquired businesses, often through stringent inventory management, found that operational efficiencies will only take you so far in the face of a 'black swan' event.