Bidder for aerospace firm Meggitt should be pressed to beef up its commitments

Parker Hannifin could potentially be a decent owner but its commitments are too easy to wriggle out of

The only simple element in US group Parker Hannifin’s £6.3bn bid for Coventry-based defence and aerospace business Meggitt is the takeover premium: an offer at 71% more than last week’s share price counts as fat by any measure. UK investors, once again, have been guilty of seriously undervaluing a FTSE 250 industrial company. Meggitt’s line of work – brakes, sensors, valves, fuel tanks and other components for commercial and military aircraft – may not be glamorous, but will endure beyond current pandemic upsets.

The tricky part is the “legally binding commitments to HM Government” being championed by Cleveland-based Parker as a way to try to make the deal go down easily with UK politicians. “Legally-binding” is a phrase meant to impress. The actual commitments do not. Or, rather, the problem is that they don’t last long.

Only one pledge – the promise to increase Meggitt’s research and development spending in the UK by 20% over five years – relates to a period of more than 12 months. Even that one carried the qualification that it is “subject to normal levels of growth and activity occurring in the aerospace industry”, which reads as a subjective get-out clause.

Other promises look more like gestures. A Meggitt subsidiary board populated by a majority of UK nationals? Fine, but, if the board can be ripped up after a year, you’re not committing yourself to anything that can’t be undone quickly. The jobs promises relate only to a “significant” portion of the UK workforce, rather than the whole. And the commitment to “increase by at least 10%” the number of Meggitt apprentices in the UK translates as a boost in such posts from 100 to a minimum of 110 for a single year. Come on, that’s not a game-changer.

As it happens, Parker may be a better owner for Meggitt than most potential suitors. It may even prove to be “a responsible steward of Meggitt”, as Sir Nigel Rudd, the UK company’s chairman put it. Parker is a Fortune 250 company worth $40bn, is an existing supplier to the UK Ministry of Defence and already employs almost as many people in the UK (2,100) as Meggitt. If the UK company’s destiny is to end up within an international combo, there are worse places to be. At least this is not another private equity bid, a point Tom Williams, chairman and chief executive of Parker, made himself.

But, if Williams wants to demonstrate long-term seriousness, he must do better than his current list of pledges. Dialogue with the UK government starts now, he said, which business secretary Kwasi Kwarteng should regard as a challenge to secure commitments that don’t evaporate in no time at all.

Only 5% of Meggitt’s revenue comprises MoD work and the US is its bigger market, but Kwarteng is not without leverage. Meggitt is a critical supplier to Rolls-Royce and BAE Systems and the backdrop is a shrinking of the UK’s quoted defence and aerospace sector. Cobham has gone already and Ultra Electronics and Senior are in the frame. If Kwarteng is minded to do more than twiddle his thumbs, this is his moment.

China matters more for HSBC than other banks

HSBC, under fire for its seemingly supine approach to demands from Beijing, has its line on Hong Kong and it’s sticking to it. Complying with local laws is a tricky business and the complexity “applies to any global institution that spans multiple markets”, said chief executive Noel Quinn.

The problem with that argument is that HSBC isn’t exactly like any other bank when it comes to Hong Kong. The territory is its biggest source of revenue and profit, and an authoritarian regime in Beijing looms larger in HSBC’s life than it does for, say, Citigroup.

That being so, HSBC should prepare for days like Monday when strong profit numbers provoked no reaction in a share price that continues to sit stubbornly below book value. The fog of geopolitics lies thick over HSBC and will not clear easily.

Afterpay price tag is a lot by any metric

The buy-now-pay-later phenomenon is clearly here to stay, but $29bn is one hell of a sum for Square, Jack Dorsey’s fintech outfit, to fork out to buy Afterpay, the Australian rival to Klarna and others. Afterpay has 16 million people who use its service, so the price-tag equates to $1,800 per customer.

That’s the wrong way to view things, perhaps, because merchants, not consumers, pay Afterpay a fee. Even so, a per-customer metric is not entirely irrelevant. No wonder Square is paying in the form of its own highly priced stock. Trying to fund this deal with cash might kill the buzz instantly.

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