The 100-Year-Old Company That’s on a $10 Billion Shopping Spree

(Bloomberg Businessweek) -- Parker-Hannifin Corp., maker of motion-control technology for planes and factories, isn’t a household name. But at $20 billion, its market value is bigger than that of Nordstrom, Harley-Davidson, and TripAdvisor combined. Founded in 1917 in Cleveland, it waited almost a century before doing a deal bigger than $500 million. But in the almost five years that Thomas Williams has been chief executive officer, Parker has announced not one but three large takeovers, each over $1 billion.

First came the $4.3 billion purchase of filtration company Clarcor Inc. in 2017. This April, Parker announced the $3.7 billion acquisition of adhesives and coatings maker Lord Corp. Come July, Parker was back in the M&A news with the $1.7 billion purchase of Exotic Metals Forming Co., which makes high-temperature engine components and exhaust management systems for aircraft including Boeing Co.’s 737 Max.

The Clarcor deal is the only one that’s closed, but all three are part of Williams’s push to make Parker’s finances less vulnerable to swings in the economy by bolstering its margins and growth prospects. So far, it’s worked: Cost savings are tracking ahead of the initial target, and Parker is squeezing more profit from its revenue. But while Clarcor gets a higher share of its revenue from less volatile repair and maintenance work, its business, like most of Parker, is still tied to cyclical machinery markets.

After adjusting for the impact of currency swings and M&A, sales growth at Parker turned negative in the three months ended June 30, the first time that’s happened in two and a half years. The company expects sales at best to be little changed in fiscal 2020, but the prolonging of the U.S.-China trade war puts even that downbeat guidance at risk. Against this backdrop, it’s understandable that Williams sought a shot in the arm.

While Clarcor wasn’t screamingly cheap, Parker bought it just as the company’s sales growth was starting to recover from the manufacturing recession in 2015 and 2016. With Lord and Exotic Metals, Parker is paying rich price tags for businesses that are arguably near a peak with less obvious opportunities for cost cuts and margin gains. It’s also loading up on debt, causing Standard & Poor’s to downgrade its credit rating in July.

The buying spree could transform the company. But analysts and ratings agencies agree: Parker has much to prove.

Bit by Bit

Already, since fiscal 2016, adjusted Ebitda margins have climbed from 14.7% to about 18% in the year ended June 30.

Still Room to Improve

Parker has said it can achieve a 20% Ebitda margin by fiscal year 2023. Its recent deals may help it get there.
 
Sutherland is a deals columnist for Bloomberg Opinion.

To contact the editor responsible for this story: Jillian Goodman at jgoodman74@bloomberg.net

©2019 Bloomberg L.P.