Eaton Starts the Transformation

A major acquisition helps Eaton nearly double its electrical business as global demand grows for reliable, efficient electrical energy.

On November 30, diversified industrial manufacturer Eaton Corp. completed the biggest acquisition in its history when it purchased electrical equipment supplier Cooper Industries for $13 billion. Combining the results of the two companies, the new Eaton Corporation plc would have had revenues of $21.8 billion and EBITDA of $3.3 billion for the four quarters ending September 30. The combined firms have approximately 100,000 employees and sell products in 150 countries. Eaton CEO Alexander Cutler said the integration of the two firms will take two to three years. For tax purposes, the company will be incorporated and headquartered in Ireland. This will have no impact on Eaton’s Cleveland area or regional offices.

We caught up with Eaton Vice Chairman and COO for the Electrical Sector Tom Gross a few days after the acquisition was completed and asked him about the deal and the company’s outlook for 2013. Gross, an engineer by training, joined Eaton in 2003 after a manufacturing career spent with Danaher, Xycom Automation and Rockwell Automation.

You’ve just complete the acquisition of Cooper. How does it change Eaton?

It makes the electrical part of Eaton substantially bigger. It didn’t quite double it but pretty close… We are currently organized into the electrical sector and the industrial sector. Electrical has been growing quite quickly. This turbocharges that growth. If you look at Cooper and Eaton’s 2011 revenues, it makes Eaton’s electrical sector about $12.6 billion. We aren’t quite done with 2012, but you can anticipate it will be bigger than that.

Why is the electrical market so good? Why has Eaton focused on it?

The usage of electricity is becoming more and more pervasive. We all are instinctively aware of that. If you think about investments in electrical infrastructure and that is what our electrical business satisfies, market growth is coming from a number of different areas. Demand continues to grow. There are upgrades in infrastructure. As we just witnessed on the east coast, infrastructure is quite old and frail. There are investments in energy efficiency, because in addition to it being fragile, it is pretty inefficient. And then investments in safety. If you look at all of that together, the electrical market growth rates have been very strong, so it is a large market that is growing disproportionately for all those reasons. We have been a significant player in the market since about 1978.

What are some of the issues facing you in terms of integrating the two companies?

We assembled an integration team to begin looking at that quite early. We’re now having some deep discussions on what it means to integrate these two companies. It is amazing how there is virtually no overlap. Two large electrical businesses grew up serving primarily the same segments and have virtually no product overlap. We are calling it transformational because it makes us a much broader solutions supplier to exactly the same customers that both of us have been serving independently for a long, long time. Integration will take on different forms. It will include all the normal things that you look at like brands and the sales force… We are mostly excited about taking this out in the marketplace and becoming an even more relevant and more trusted supplier to our customers. That will be the primary focus of the integration because that is the primary opportunity with the deal.

Does Cooper run its plants in a fashion similar to Eaton?

All the basics are very similar. There is a focus on innovation, a focus on end users and channel intermediaries – very strong on both. Quality of products is impeccable in both. The companies look alike. If you go to a typical distributior, Cooper and Eaton - each of us would be in top five suppliers for each of the major channel partners. That is because we have conducted our businesses in similar ways. We tend to have more of an integrated operating philosophy. We call that the Eaton Business System and it is best understood as wherever we find a best practice, we deploy it across the company. We are relentless in our discipline of deployment. That creates another opportunity for us in applying that integrated operating model to the Cooper environment.

Customer Energy Concerns

We have a lot of concerns and debate about energy these days. What are you hearing from customers about how they want you to help them with this issue?

There are two primary areas. The first is efficiency. There is a long chain of equipment between where power is generated and where it is consumed by the light bulb and motor. Many hundreds of electrical devices along that chain. Some take up only a little bit of power and some take up a lot of power. If you think about total power loss from generation to consumption, it is quite large. There is this demand to make that chain of equipment that we call the power chain more efficient and less of a drag. We should be thinking about the next watt of power being generated as really the last one saved and recapturing some of that lost capacity.

As an example, when you look at power hungry applications like data centers, the traditional chain of electrical equipment in the data center - I’m not even including all the things that lead up to the data center but just in the data center -­ used to consume more than 10% of the data center’s energy cost. Up in heat. Now you have to throw another 10% at it to cool it. Computers don’t like heat. That is very inefficient. We’ve been diligently working that problem since 2004. Now we have the chain maybe at most using 2% to 2.5% of the total energy. That is an enormous savings. It is good financially but even better from an environmental perspective, given how many data centers there are around the world.

The second area is safety. Electrical energy can be dangerous, particularly as it comes out of the utilities where it is very high voltage. Safe electrical equipment is on everybody’s interest list and it is harder than it sounds. It is not just safety from electrocution -­ it is safety from arc flashes that can injure people or cause explosions. Both Eaton and Cooper are extremely good, probably top two leaders in world, in electrical safety. When you look at an application like an oil well, safety is a big deal. That is why you see so much Eaton and Cooper equipment on mission critical applications like that.

Has the weak economy in the U.S. and Europe affected investment for upgrading electrical systems?

It has put a damper on investment in infrastructure in a lot of areas. There is level of hesitation in terms of major capital expenditures. That is certainly true in Europe and here in the U.S. But the market is still quite robust because energy prices are still high. There are terrific markets in all the industrial markets -­ oil & gas, mining, water, wastewater. Universities and hospitals continue to be big projects. Pure infrastructure is bit hesitant but on the other hand, it is a long chain from where electricity is generated to where it is consumed. Usually some markets are hot and some are not at any time. There are a fair amount that remain hot and we remain focused on those. It is so critical from a market perspective to be an agile supplier for this reason.

What is Eaton’s outlook for 2013?

We’re going into 2013 with healthy dose of caution in terms of our own investments. But so many things remain constant –focus on innovation and spending on new product development. The integration of Cooper will continue in brisk fashion. We will continue to grow. Maybe growth rate isn’t as much as we like in 2013 but we expect markets generally to be up on a global basis. There will be some caution but certainly from an electrical perspective, the megatrends will continue. Need for more energy. It is going to be scarcer. It will need to be much more efficient. Across our power management business, those megatrends will continue to play out. The only difference will be level of growth that they play out but they are megatrends and they are not likely to slow down or reverse. We anticipate a plus market, but we’re going in with some caution.

Manufacturing has enjoyed a very good run since the great recession. What’s your outlook on American manufacturing?

I think the U.S. is a terrific place to manufacture products, particularly our kinds of products. They’re big, they’re bulky, they’re very intense in terms of the skill required to manufacture some of these large solutions we make. We continue to invest in manufacturing in the U.S. We believe in broad terms that it is better to manufacture the products we sell in the United States in the United States, and we do that to a large degree. At the same time, those things don’t ship always from the U.S. to other countries very well so we have invested in manufacturing for those local markets as well. We continue to have a terrific and large manufacturing footprint in the U.S. It is a very strategic asset.

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