New wave of takeover activity lifts UK market and HSBC at a major turning point

Takeover Activity Aplenty

“The UK takeover spree continues to move at pace, with yet another FTSE 250 stock receiving a bid,” says Russ Mould, Investment Director at AJ Bell.

“Aerospace and defence components group Meggitt has become the latest target for an overseas buyer, and one pitched at a very generous 70.5% premium to last Friday’s closing market price.

“The bid for Meggitt, together with well-received numbers from HSBC and chatter about a potential counterbid for Morrisons, helped to push up the FTSE 100 by 0.9% to 7,096. UK stocks have long been considered cheap and this year’s M&A spree shows that overseas investors have finally got enough confidence to pounce on opportunities after years of showing little interest in the market.

“With a 6% gain, the top FTSE 100 riser was Melrose Industries on positive read-across from Meggitt given it also has interests in the aerospace and defence sector, having bought GKN in 2018. It would be interesting to see if this predator becomes prey, as Melrose has historically been the one doing the bidding.

“The FTSE 250 hit a new record high of 23,305 as its cohort of mid-cap stocks is seen to be better hunting ground for takeover targets than the large cap FTSE 100 index. Existing FTSE 250 bid target Sanne received an offer from private equity group Apex at 920p per share, having previously been subject to 830p, 850p and 875p per share offers from Cinven.

“We’ve seen quite a few private equity suitors having to raise their offers this year as companies and shareholders push back on initial approaches, saying they are too low. Private equity firms have a reputation for trying to get a bargain, but their tactics have been fully exposed this year and it now seems rare for the first offer to be the winning one.”

HSBC

“The market is a strange beast. In recent weeks we’ve seen share prices fall on better-than-expected results. Now, with HSBC, we’ve got a rising share price on some worse-than-expected figures.

“HSBC missed market forecasts on dividends and the CET1 ratio. Investors instead focused on second quarter pre-tax profit being better than expected and positive messages from the boardroom that net interest income has stabilised.

“Banks are now at a major turning point and what really matters is the speed and scale of the economic recovery.

“During the various lockdowns, consumers saved significant amounts of money while banks were overly cautious and made provisions for big losses on potential bad debts.

“That dynamic could start to unravel, with consumers spending their spare cash which would help to drive economic growth, and banks have begun releasing some of their bad debt provisions which weren’t needed after all. The latter effect has been a key contributor to some of the banks’ earnings this year, including HSBC.

“Going forward, banks’ earnings will need to be driven by more traditional means, namely making more money from the interest charged on loans and credit cards than paid out on savings deposits.

“HSBC is also pushing its commercial banking and wealth management operations to make money, the latter particularly in Asia. At the same time, it is trying to fight off competition from both traditional and challenger banks by embracing new technology-led services. For example, in the UK, it has recently launched a mobile banking service for business customers.

“Any setback to the economic recovery from the pandemic would create major headwinds for HSBC and other banks. The continued spread of the Delta variant, the imminent end of the UK furlough scheme, and general ongoing uncertainty among many businesses would suggest the banking sector is not in the safe zone just yet.”

These articles are for information purposes only and are not a personal recommendation or advice.