The FTSE 100 firm's board unanimously rejected a bid from Melrose received 8 January that valued the company at 405p per share, a 24 per cent premium on its 5 January closing price.
The "opportunistic" offer was made up of 80 per cent in new Melrose shares and 20 per cent in cash, giving GKN shareholders 1.49 new Melrose shares for each issued and to be issued GKN share, plus 81p in cash per GKN share. GKN shareholders would have held around 57 per cent of the combined group.
In a statement, Melrose said if it owned GKN it would reverse a "history of existing GKN management not delivering on margin targets".
The FTSE 250 company said if GKN hit the top end of its margin in 2017, the group's profit would be around £300m higher than consensus figures.
Melrose must now make a firm offer for GKN or withdraw its bid by 9 February.
Shares in GKN were up nearly 26.09 per cent at 419.5p at the time of writing while Melrose shares were up 5.58 per cent at 227p.
Splitting the business
GKN also said it intends to separate its aerospace and automotive businesses to "[recognise] the strategic optionality for shareholders in having separate companies with distinct investment profiles and capital allocation policies".
It said: "The board will communicate further details on the optimal method of separation in due course. The timing of the separation will be determined by the need to maximise the economic benefits and minimise the costs associated with separation."
The firm issued a profit warning in October over problems at its aerospace division.
GKN also announced interim chief executive Anne Stevens would become the new boss of the company with immediate effect after its incoming chief executive left the group in November before taking up his new role.
Annual trading was in line with expectations and GKN continues to expect 2017 management profit before tax to be slightly ahead of the previous year's £678m before write-offs from its North American aerospace business, which are estimated to be between £80m and £130m.
Making up for slow progress
“GKN has made up for years of lumbering progress in a flash," said Nicholas Hyett, equity analyst at Hargreaves Lansdown.
Hyett said: "A takeover offer, subsequent rejection, new CEO, transformation strategy, trading update and planned separation of the business all in one go – it’s hard to describe GKN as a Mondeo now!
"The separation of the automotive and aerospace units has been on the cards for years, with little obvious cross over between the two businesses. Historically, the pension deficit has held the group together, but with the sprawling footprint likely to have contributed to recent profit warnings, the reasons for divorce now seem to outweigh the costs of splitting.
"The money to be made from a split is likely to have been what drew turnaround specialist Melrose to the table in the first place – the challenge for newly confirmed CEO Anne Stevens is to deliver a better result for shareholders than the 405p she turned down today.”