“We’ve obviously developed into truly a giant company,” Richard Fearon, the vice chairman and chief financial and planning officer of Eaton Corp., reflected earlier this month.
Indeed, with its acquisition of Cooper Industries, a big electrical-equipment supplier based in Dublin, Ireland, in November, Eaton has a market cap of more than $30 billion and employs more than 102,000 people. “That gives you the scale advantages that allow you to compete everywhere around the world,” says the CFO of Eaton, which likes to refer to itself as a “global power management company.”
That boils down to a fairly lengthy list of products and services. Besides electrical equipment, it offers power transmission, lighting and wiring products; hydraulics components; aerospace, truck and automotive systems; and much else.
While Cooper is the biggest company that it’s purchased, Eaton dwarfs its acquisition. Thus it’s curious that the parent company has relocated its Cleveland headquarters to the home base of its target.
To be sure, placing the combined company in the business-friendly city will save Eaton a bundle in taxes. Fearon has strong opinions about the difficulties of operating under the U.S. tax code. But much else went into the decision to move. An edited portion of CFO’s recent interview with the strategy-minded finance chief follows.
Why did Eaton move its headquarters to Dublin?
The only way to make the transaction happen from a legal and financial standpoint was with the overall parent being in Dublin. As we thought about it, we said there are some long-term advantages to being in Dublin. First of all, we’re a very global company, and from Europe it’s easier to get to Asia. It’s as easy to get to South America, since Ireland is the farthest west part of Europe. It’s not very hard to get to the United States either. So, it’s not a bad place to have a global headquarters.
It’s also a very business-oriented country. I lived for a long time in Singapore, which is also very business-oriented, and Ireland reminds me a lot of it. If one needs to have a discussion with a government official about a policy or a particular need of a business, it’s relatively easy to arrange a discussion about that. The government officials we’ve interacted with have been, by and large, very pro-business, pro-growth.
We also chose Dublin because it does have a tax climate that’s a bit more favorable than some countries. We’ve made $160 million a year in tax and cash management savings. The U.S. tax code, which is a global system, really penalizes companies for taking cash back into the United States. That probably isn’t the most sensible system, because it causes companies to be reluctant to bring cash back. And of course cash is used for investment, for returning money to shareholders, things that are positive for the United States. Ireland is much more pragmatic, and the tax rate is quite low. For most treaty countries, the tax rate there is 12 percent. In comparison, the U.S. rate is 35 percent, in addition to state and local taxes.
When we looked at Ireland, we saw a very positive regulatory climate, a talented work force and a tax structure well-suited for big multinational companies. If we were starting from scratch, we would not necessarily elect to go to Dublin. But in our case, the question was really: Do you want to do Cooper or not? And if you wanted to do Cooper you pretty much had to say, we’ll make this move.
Why was it necessary for Eaton to move to Dublin to acquire Cooper?
Because the U.S. tax system is so disadvantageous to multinationals that to bring Cooper back into the United States would mean an immediate sizable increase in their tax bill. And there was no way that we would then be able to make the economics of the transaction work. After a lot of discussion, we agreed to the concept of a new Irish holding company that would effectively end up buying what was Eaton Corp.
Have you personally moved there?
No, I have not. Certain people have. Although I’m there often, this is still early days — we haven’t owned Cooper for more than nine months. I’ll probably end up being in Dublin five to seven times a year for various lengths of time. It will be a little easier once our building is renovated. Right now, we’re working out of temporary space.
Was it a challenge for a company of your size and scope to find appropriate headquarters space in Dublin?
Interestingly, real estate in Dublin isn’t as readily available for what would be appropriate for a corporate headquarters as one might think. The reason is that they haven’t really built very much in the last five years. When the financial crisis happened, part of it was a real estate bubble. Financing dried up and people just stopped building.
Thus, when we went around Dublin, we didn’t find many buildings of suitable size or suitable modern conditions that we could buy. And our view is that when we are going to have real estate for the long haul, we don’t want to rent it. We want to own it because it doesn’t make any sense to be a lessee when you expect to be there for as far as you can see. And so that led us to look around and acquire this building that did unfortunately need some renovation.
What compliance challenges did you face in doing the Cooper deal?
To get the transaction done was complex from a regulatory standpoint because we had to satisfy Irish securities regulators and the SEC. We are an NYSE-listed company and so we’re still an SEC registrant, even though we’re Irish-headquartered. And SEC requirements don’t change very much because they’re really requirements to disclose such things as how your operations are performing.
The tax laws have become much simpler for us to comply with in Ireland. You’re subject to U.S. laws for your U.S. operations, but you’re not subject to it for the operations that no longer report into the United States. So operations that report up to the Ireland parent company are subject to Irish tax regulations and the tax regulations of individual countries.
Clearly our U.S. businesses are still subject to certain U.S. regulations, such as, [in Eaton’s aerospace operation] ITAR (International Traffic in Arms Regulations) regulations and OSHA [Occupational Safety and Health Administration] regulations. They’re subject to whatever the local regulations are wherever they are and to a limited extent some Irish regulations. But overall, it’s a less burdensome mix of regulations.
How does the Cooper acquisition fit into Eaton’s overall corporate strategy?
The Cooper acquisition is a culmination of a long transformation of the company. We’ve done 65 acquisitions starting in 2000, Cooper being the largest, at a purchase price of about $13 billion. And those 65 acquisitions in total acquired about $12 billion in revenue, with Cooper accounting for $6 billion of that. And given that our sales this year are between $22 billion to $23 billion, the majority has come about through these acquisitions.
The acquisitions have changed our industry mix, I would say permanently, to a more diversified one. But today, we’re about 60 percent electrical equipment. That’s an industry that we’ve always thought had a very strong potential in terms of high growth, attractive margins, good returns on capital.
We also think we’ve created a good balance through typical economic cycles with the different businesses we have, and more consistency.
What effect did acquiring Cooper have on Eaton’s geographic business distribution?
We were close to 60 percent non-United States. Cooper is a little more U.S.-oriented, and that’s pulled us back to 50-50. But if you look at our 102,000 employees, the majority, by a fair margin, is outside the United States.
Was the movement back to a more domestic business mix strategic on your part?
Not really. It happened because of the way Cooper was. Cooper’s a company that we have known for a very long time. We have thought for a very long time that it would be a great complement to the electrical business that we had. And we started discussions a while ago and as these large transactions sometimes do, it took many years to come to fruition.