Danfoss-Eaton deal shakes up fluid power industry

NORDBORG, Denmark—A $3.3 billion transaction between two of the largest power management companies in the world is complete, as Danfoss Co. acquired Dublin, Ireland-based Eaton Corp.'s hydraulics unit Aug. 2.

The addition brings about 10,000 former Eaton employees into the Danfoss fold and adds about $1.8 billion in annual revenue to Danfoss, specifically the Danfoss Power Solutions segment, which doubled in size with the Eaton Hydraulics addition.

"This is a great day for Danfoss as we welcome 10,000 new colleagues into the organization and create a global leader in mobile and industrial hydraulics," said Danfoss President and CEO Kim Fausing. "By combining the knowledge and experience of the two strong businesses and great teams, our customers will receive an unmatched level of service and expertise from a single partner.

"We will continue our significant investments to stay on the forefront of technology leadership and provide solutions that improve productivity and reduce emissions to meet the requirements of the future."

The transaction, which closed 19 months after it was announced in January 2020, was contingent upon U.S. Department of Justice and European regulatory agency approval and the subsequent divestment of Danfoss and Eaton facilities in the orbital motor and hydraulics steering unit spaces.

While Eaton's Hydraulic unit accounted for about 86 percent of the entire segment revenue, Eaton will retain about 14 percent of the unit with its filtration business and golf grips business (Golf Pride). Overall, the hydraulics business represented about 10 percent of Eaton's operations, including a substantial hydraulic and industrial hose business.

"Today's announcement is part of the ongoing transformation of Eaton into a higher growth company with better earnings consistency," said Craig Arnold, Eaton chairman and CEO. "We believe this transaction will create substantial value for our shareholders and allow our hydraulics employees to be part of a company that has a strong commitment to the hydraulics industry."

Eaton Corp., which maintains its North American headquarters in Beachwood, Ohio, posted 2020 revenues of $17.9 billion, with the hydraulics unit at $1.8 billion. The company sells to customers in more than 175 countries. Eaton now has approximately 96,000 employees.

Danfoss Power Solutions is on pace to have about $4.7 billion in sales revenue this year. This number takes into account the Eaton Hydraulics acquisition as well as the approximately $257 million lost with the divestment of Danfoss units.

Overall, Danfoss A/S increases by about one-third with the acquisition and brings the overall number of Danfoss employees to about 38,000, with between 17,500 and 18,000 employees now within DPS.

While no personnel changes are planned, such a massive addition means "never say never," according to Eric Alstrom, president of Danfoss Power Solutions.

"Our ambition is to find a job for everybody with this transaction," Alstrom told Rubber News Aug. 13. "This is a growth story, a tremendous opportunity. We are adding 800 sales people worldwide and 800 engineers worldwide and we are excited to access new sites on the hydraulic side—all of these things are assets.

"There will be changes but it's important to me to emphasize that this is a growth story, not a synergy one, and no merger-related layoffs are planned."

Danfoss Power Solutions adds roughly 30 former Eaton Hydraulics locations to its existing 24 locations, bringing the total to 54 manufacturing locations for DPS.

Of note are manufacturing sites gained in Japan, South Korea, Mexico, Europe, Singapore and China.

"It is very difficult to establish operations in Japan," Alstrom said. "And we have longed for manufacturing in South Korea, giving us access to marine and off-road markets.

"We want to be close to our customers; we are not a fan of long supply chains. This gives us great flexibility and better depth as demand skyrockets in agriculture, construction, material handling and specialty machines."

Despite the 19-month delay in the acquisition closure, Alstrom said the timing "is as good as any."

"It takes two to tango," he said. "Someone needs to want to sell and someone needs to want to buy. It matched up for our part, as we have a long relationship with Eaton as a supplier. By virtue of that, we had 'ins,' so to speak, at the highest levels.

"But we have had our eyes on them for quite some time—for four to five years we have kept a close eye on Eaton Hydraulics. There is mutual admiration on both sides ... it was a bit like two twins coming together."

Eaton officials did not return requests for comment from Rubber News beyond what was provided in the news releases from both companies.

Divestments resolve antitrust suit

According to the U.S. Department of Justice, approval of the multi-billion dollar sale involving the two largest suppliers of orbital motors for mobile off-road equipment in the U.S. required Danfoss to divest orbital motor and hydraulic steering unit facilities located in Hopkinsville, Ky.; Parchim, Germany; and Wroclaw, Poland.

Eaton divested two orbital motor production lines and one hydraulic steering unit production line from facilities in Shawnee, Okla., and Eden Prairie, Minn.

About 800 Danfoss employees were affected by the divestments, while Eaton transferred only equipment to Interpump S.p.A., the company to which the divested units were transferred.

"We did not expect it to be such a complicated process ... we did not think it would get to that point," Alstrom said. "We do not divest often, and this was personal to me as these were employees we had to say goodbye to. We didn't have much choice but to oblige, and we had to divest a rather significant portion of the segment.

"That said, it was necessary to make this transaction close and it remains a fantastic opportunity."

Interpump Group is an Italian-listed company that is strongly into hydraulics, a provider of cylinders, pumps and valves with operations in North America, Europe, South America and Asia.

"They have been a market player for many years," Alstrom said. "They are a very solid company and a great home for our former employees."

The U.S. Department of Justice said in a news release that, absent these divestitures to Interpump Group, the Danfoss-Eaton deal would have led to "higher prices, decreased quality of delivery and service, and diminished innovation."

"Orbital motors and hydraulic steering units are essential components in equipment used in the agricultural, industrial and construction industries," said Acting Assistant Attorney General Richard A. Powers of the Justice Department's Antitrust Division. "The transaction, as originally proposed, would have led to higher prices and lower quality for original equipment manufacturers in these industries that are vital to the American economy.

"The remedy preserves competition in the manufacture and sale of these products for the benefit of equipment manufacturers and consumers."

The Justice Department filed the antitrust lawsuit July 14 in the U.S. District Court for the District of Columbia to block the Danfoss-Eaton transaction, but also filed a proposed settlement the same day.

The settlement was approved by the aforementioned court Aug. 2, resolving the competitive harm alleged in the antitrust lawsuit.

"This is an exciting new chapter for both of our businesses and our people, which are stronger together," stated Paulo Ruiz, president of the former Eaton Hydraulics business. "The new Danfoss Power Solutions team will create a global leader in mobile and industrial hydraulics, drawing on long legacies of innovation and industry-leading expertise. The combined product portfolio and broadened global reach will better serve customers and distributors all around the world."

Hydraulics 'a core focus' for Danfoss

Mobile hydraulics has been one of Danfoss' core and most successful businesses for more than 50 years, Alstrom said, accounting for about half of the revenue for Danfoss A/S.

And the acquisition represents a vital part of Danfoss' growth strategy.

"The need for technologically innovative and industry-changing hydraulic solutions is as great as ever," Alstrom said. "We're very pleased to complete this significant investment in our core hydraulics business so we can serve our customers and partners even better than before. Combining the two robust businesses represents a perfect match and provides countless opportunities, such as increasing our engineering expertise and capabilities, doubling our global application support and extending the value of our Application Development Centers and digital design tools."

Leveraging Eaton Hydraulics' fluid conveyance and industrial applications are other assets gained through this transaction.

"Fluid conveyance is not a business you can build from scratch ... we have been looking at that market for a long time," Alstrom said. "And we are exclusively off-highway mobile hydraulics. Eaton has a wonderful industrial business—it is extremely important to be successful in industrial."

On the sales side, Alstrom said Eaton has "far deeper" distribution channels. And on the personnel side, Eaton brings irreplaceable application know-how to Danfoss.

"Solving customer problems is deeply rooted in both entities," Alstrom said. "We consider hydraulics a core business, and we are focused on sustainability and improving the world around us.

"But we can do a lot more—we can improve the performance and efficiency of machines through reduced emissions and productivity improvement. We will be even better at servicing and helping our customers."

Branding will not change for the foreseeable future, Alstrom said, as known Eaton brands like Vickers (power and motion control components) and Aeroquip (hose, couplings and accessories) "will be nurtured and kept."

"Rest-assured we understand the essence of these brands—they are strong brands and deeply rooted in our industry," he said.

Looking ahead, Alstrom is bullish on the global hydraulics and power solutions industry.

"Why are we so optimistic? Hydraulics is a very mature industry, but there is tremendous opportunity to improve with emissions reduction and the fuel consumption of machines," he said. "Conventional Danfoss hydraulic pumps are 6 percent more fuel efficient than the closest competitor—a significant savings for a fleet of machines. In addition, we are launching digital displacement pumps, offering efficiency gains of 30-40 percent and productivity gains in the same range, for example, for an 18-ton excavator. So, hydraulics still offer significant improvement opportunities.

"Through simulation and hardware, customers are investing in hydraulics. Electrification is coming in a big way, in off-highway applications as well. There remains a strong advantage for hydraulics for energy and power density.

"That is our insurance premium for the future—where hydraulics meets electrification."

Alstrom said both excitement and trepidation associated with the transition have been communicated to him from employees at the former Eaton sites he has visited thus far.

"They are asking the same things, about branding, possible closures and job security. All of those things are on people's minds," Alstrom said. "But I get the strong impression after visiting three sites in the U.S. and a couple in Mexico that people are relieved to know that they ended up in a company where hydraulics is core.

"My takeaway is that employees are proud to be joining Danfoss. One thing that is important to me as a leader is that we are both leaving a company behind and forming a new company together. It was an acquisition, but we look at it as a merger.

"It's not a big brother-little brother situation. It is two companies coming together to create something much better than it was before."