Danfoss' acquisition of Eaton Hydraulics breeds success | Rubber News

Oct 14, 2024

AMES, Iowa—One year removed from the $3.3 billion acquisition of Eaton Corp.'s hydraulics segment by Danfoss Co., and the combination is proving that there is strength in unity.

The two similarly-sized companies—Eaton's unit with about 10,000 employees and Danfoss Power Solutions (the Danfoss A/S Group segment that absorbed the former Eaton Hydraulics) with about 8,000 employees—have seen their partnership blossom since the transaction closed in August.

"The transition has gone very well. ... Hopefully that means more coming from a legacy Eaton person," said Tony Welter, president of the hydrostatics division of Danfoss Power Solutions and an executive in the former Eaton Hydraulics branch. "Something like this can make for quite a bit of change. At Eaton, we made our own acquisitions over the years that presented their own challenges. But with this, we were quite excited—we are two strong companies coming together with a proud and intertwined history.

"The biggest thing—beyond the similarities or differences—is the cultural match. If you don't have a good cultural fit, you don't have quite as good of a match."

With Eaton's expected $2 billion in additional revenue for DPS—numbers offered by Danfoss—the revamped DPS is estimating sales revenue of more than $5 billion in 2022.

The forward-looking perspectives drew the companies together, and the newly formed manufacturing footprint in the agricultural off-highway and construction spaces is a welcome one for DPS.

But the outlooks of DPS and Eaton Hydraulics also were fundamentally different.

While Eaton had maintained a more regional scope to its fluid conveyance and hydraulics businesses, Danfoss projects a global, more transparent vision.

Both philosophies can be leveraged accordingly, according to Eric Alstrom, president of Danfoss Power Solutions.

"Eaton Hydraulics was a regional business," Alstrom told Rubber News. "The benefits were in the regions ... and that might be the biggest change coming from a legacy Eaton standpoint, going from a regional structure to a fully global structure.

"As well, the transparency at Danfoss is a rather significant change (for the legacy Eaton business). But these are two similarly sized businesses coming together—and if things go the way we are planning, we will pass $5 billion for the year, outgrowing the goals that we had set for the combined business."

There have been challenges in combining the historic businesses, but the teams have cleared the major hurdles in the first year.

"I am extremely proud of what our team members all over the world have accomplished," Alstrom said. "The transaction was Aug. 2 (2021) ... and we were up and running by Jan. 1 (2022)."

With Eaton Hydraulics on board, DPS now has distinct fluid conveyance (hose and tubing), industrial hydraulic, hydrostatic (pumps and motors) and power control (valves and fittings) divisions.

While there has been some turnover for the 10,000 or so legacy Eaton employees, Welter said most have remained with their new company.

"The short answer is yes, most have stayed," Welter said. "It is an interesting time with the labor (market) dynamic right now. But things have been incredibly stable despite all the change.

"We have had a few folks who have taken other opportunities, but by and large, it has not been anything above the standard historical turnover that takes place."

Alstrom said it is not uncommon during such transitions that "people look for something new."

"But there really has not been tremendous change," Alstrom said. "We recognize the change, going from a publicly owned company to a family-owned company.

"We are very transparent with our profit and loss, and that may not be something (legacy Eaton Hydraulic employees) were used to. Their outlook was a quarter of a year ... the DPS outlook is more like a quarter of a century."

On the sales side, Alstrom noted that Eaton Hydraulics had "far deeper" distribution channels. And on the personnel side, Eaton brings irreplaceable application know-how to DPS.

"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."

The addition of Eaton Hydraulics also adds an industrial division to Danfoss—an entirely new market for DPS.

"The industrial division (at Eaton Hydraulics) had assets that we really were drooling over," Alstrom said. "You cannot just get into that space organically.

"And the same goes for fluid conveyance. People might think a hose is just a hose—but there is a lot of science and a lot of craftsmanship behind it. And quite frankly, it is really high-tech. It is not something you just start doing from scratch. Credibility with customers takes a long time to establish (in fluid conveyance)."

There is no plan to change the popular branding with Eaton products, Alstrom said, as 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.

Alstrom added that there have not been a lot of redundancies in the transition.

"On the product side, we probably do not need two piston pumps with the same displacement and power, so this will bring new ideas to engineering. ... Over time some products may be phased out," he said. "But we are very proud of the Vickers and Aeroquip brands, now branded 'by Danfoss.'

"We are keeping the fluid conveyance products brands as they are so strong. Our customers can be reassured that we are investing in these brands."

From a legacy Eaton Hydraulics standpoint, the focus has been on leveraging capacity and scale, Welter said from his office in Eden Prairie, Minn., where a DPS hydraulic component manufacturing facility is located.

"Where they looked to us in North America, we looked to their channels in Europe," he said. "They bring Europe into the mix for us."

While Eaton Hydraulics—comprising two major units, fluid conveyance and hydraulics—brought technical know-how and regional market reach, Danfoss offers never-before-realized resources.

"This merger came at an opportune time in the industry, especially for the business cycle we are in," Welter said. "We have taken advantage of the footprints at each other's sites to meet the demands and needs of businesses.

"But one of the big things for us—and I say this with a bit of jealousy—are the application development centers at Danfoss (in the U.S., Europe and China). We did not have that at legacy Eaton. The test tracks, the capabilities ... we are really excited to get that. And for our customers, seeing is believing."

Alstrom said the combination is providing "much more cross-pollination than expected."

"We are the applications experts in the industry now," he said. "We now have a full reach into industrial and off-highway. We are headed in a very good direction and we truly are at a different level now than we were as standalone entities.

"This was easily the best consolidation ... that could have happened from a customer perspective."

Danfoss Group is fairly evenly split in its sales geography, with a third of its overall revenue coming from the Americas, a third from the Europe, Middle East and Africa region, and a third from Asia.

DPS, however, sees 50 percent of its revenue come from the Americas, a third from Europe and about 20 percent from Asia (the market seeing the greatest growth), Alstrom said.

One of the most difficult markets to penetrate is Japan, and the fact that Eaton has manufacturing facilities there makes Alstrom bullish on the prospect.

"Having lived there and worked there, and knowing how difficult it is to penetrate as a market—and Danfoss has a significant electrification business —by virtue of now having manufacturing there, we now have completely different opportunities," he said. "I cannot tell you how bullish I am on Japan.

"We are finally someone to be reckoned with there."

The future for the combined Eaton Hydraulics-DPS footprint in off-highway and on-highway electrification is bright, Alstrom added.

Whether accomplished through manufacturing locations or distribution channels, the notion of customer proximity has never been more important, the DPS president said.

"I want to emphasize again that Eaton's distribution channels are unparalleled," Alstrom said. "We have so many great new partners on both sides."

Globally, "all our markets have been red hot," Welter said.

"We haven't had a 100-year pandemic in 100 years, but all our markets have been red hot," he said. "That goes for construction, agriculture, material handling.

"On-highway with trucks may have softened a little bit, but right now all the markets are kind of in harmony. Housing demand is off the charts, as is stimulus infrastructure."

He added that DPS believes commodity pricing will remain high.

"The markets have been strong," Welter said. "Everyone has their own crystal ball, so we will see what happens."

The hydrostatics division president said the customer-centric attitude that both sides bring to the table will propel Danfoss Power Solutions in the years to come.

"It is like meeting your long-lost brothers and sisters," Welter said of the integration with DPS. "What we do makes a difference in the world. And that remains true today. ... It is all about the people. We do things in a very ethical manner, doing things right when no one is watching.

"It matters how you get results—and this is true not just in business but in the world. We also like to be successful, and we like to win. Our organization remains excited about the two business coming together."

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The $3.3 billion transaction between two of the largest power management companies in the world was completed in August 2021, when Danfoss Co. acquired Dublin, Ireland-based Eaton Corp.'s hydraulics unit.

Subsequent divestment of Danfoss and Eaton facilities in the orbital motor and hydraulics steering unit spaces occurred as part of the deal.

Danfoss divested 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 former Danfoss employees were affected by the divestments.

While Eaton's hydraulics unit accounted for about 86 percent of the entire segment revenue, Eaton Corp. retained 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 Corp.'s operations.

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.

Eaton Corp. sells to customers in more than 175 countries and now has approximately 96,000 employees.

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

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

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

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