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By Jesse Berst

Eaton Corporation (NYSE: ETN) has signaled its intentions to move into the major leagues with its proposal to buy Cooper Industries for cash and stock valued at nearly $12 billion. Our question: will the merger really provide synergies? Both companies largely missed the smart grid wave. They were neither leaders nor even fast followers. Although electric-related revenues have grown, the growth did not keep pace with more nimble rivals. Cooper has had several rounds of layoffs, the latest in 2009.

Some observers think the merger will vault the combined firm into the big time, bolstering its electrical offerings versus ABB, Emerson Electric and other competitors. Dow Jones Newswires reported CAIM CEO Catherine Avery as saying: "They're going to dominate that electrical power equipment segment."

Eaton is a diversified power management company with 2011 sales of $16.1 billion and approximately 73,000 employees. It sells electrical components and systems for power quality, distribution and control; hydraulics and pneumatic systems; and truck and automotive drivetrain and powertrain systems. The electrical side has been growing and now accounts for roughly half of total revenues.

 

Cooper employs 26,000 people, has manufacturing facilities in 23 countries and generated revenues of $5.4 billion in 2011 on everything from fluorescent lights to equipment for electrical plants. It owns a variety of brands, including Kyle Overhead Switchgear and and Kyle and McGraw-Edison power systems products. Subsidiary Cooper Power Systems, with 2010 revenues of $1.2 billion, provides smart grid technologies.

 

Although both companies are U.S. by heritage, the combined entity will nominally be headquartered in Ireland to avoid U.S. taxes. As the Chicago Tribune noted, the top U.S. corporate tax rate is 35%, the highest in the world (though few companies actually pay that much). Irish corporations are taxed at 12.5%. The Eaton-Cooper deal will lead to $160 million in annual tax savings for the combined company, even though Eaton already pays far less than 35%.

According to the Tribune, Eaton is using Cooper as a ticket to Ireland. Cooper Industries was a U.S. company itself until 2002 when it moved to Bermuda. In 2009, Cooper changed domicile a second time, to Ireland. Despite its nominal status as Irish, Cooper has actually been run out of Houston for nearly 50 years.

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Jesse Berst is the founder and chief analyst of Smart Grid News.com, the industry's oldest and largest smart grid site. A frequent keynoter at industry events in the U.S. and abroad, he also serves on advisory committees for Pacific Northwest National Laboratory and the Institute for Electric Efficiency. He often provides strategic consulting to large corporations and venture-backed startups. He is a member of the advisory boards of GridGlo and Calico Energy Services.

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