From the left in front: Palle Dedenroth, Christian Beck, Mie Breiner Damsgaard and Jette Mieritz. From the left behind: Flemming Aaskov Joergensen, Mads Rosenvang Rasmussen, Charlotte Johannsen, Henrik Garboel-Andersen.
Palle Dedenroth
Assistant Group Treasurer, Director – Treasury Cash & Funding Management
Danfoss, based in Denmark with 40,000 employees, 95 factories worldwide and sales in more than 100 countries, is a leading innovator and manufacturer of electronic and mechanical solutions servicing several industries with advanced products including power solutions, climate solutions, and A/C drives and power models.
in partnership with
Danfoss acquires a leading rival and begins to transform treasury before deal closure
The challenge
In January 2020, Danfoss announced the €3bn acquisition of Eaton’s hydraulics business. The transaction was transformational, adding €2bn to Danfoss’s €6.3bn annual sales (2019). The nature of this acquisition was unusual because rather than acquiring a consolidated group of entities with holding company and multiple subsidiaries, Danfoss acquired assets and standalone hydraulic entities from Eaton. It involved more than 30 standalone transactions (on a country-by-country basis), 13 share deals (existing hydraulic legal entities), and 21 asset deals (hydraulic assets transferred into new Danfoss legal entities). No Eaton treasury resources were transferred and Danfoss treasury headcount expanded from ten to just 12 (one of which was temporary to manage the project). Normally, M&A-related treasury integration projects begin largely after closing. Given the standalone nature of the acquisitions and absence of existing treasury resources, Danfoss had to secure treasury readiness before closing, so the new entities were able to function and operate on day one. Furthermore, the closing date was a moving target as it was subject to competition approval (it finally took place in August 2021). Danfoss spent a month assessing the needs of the Eaton entities, looking at existing account structures, processes, credit lines and guarantees, and day-to-day payments and collections.
The solution
The project centred around five streams:
Bank accounts and cash management: rather than simply duplicate existing setup, Danfoss sought to rationalise account structures and align them across underlying processes. Danfoss established over 50 new bank accounts for its new legal entities across 17 countries (selecting banks in each country from its core group of five banks). The relevant accounts were added to Danfoss’s cash pool.
Payment infrastructure: Danfoss had to connect the existing Eaton ERP into its global payment infrastructure to facilitate a variety of payments. The connectivity set-up enabled smooth payment processing from Oracle into both SAP and via TIS to the banks.
Financial shared services: Danfoss entered into a shared service agreement with Eaton, which required more than 150 new users to be set-up and trained in Danfoss payment systems to process and approve payments and reconcile collections and bank statements.
FX risk management: Danfoss had to understand the underlying FX exposures associated with Eaton hydraulics’ €2bn of sales to understand and manage the implications for the overall group FX risk position. Local hydraulics finance teams were trained to allow for correct reporting of FX exposures from day one enabling the treasury team to analyse and hedge accordingly.
Funding and trade finance: Danfoss’s target was for most of the legal entity financing to be sourced on an inter-company basis. Where this was not possible for regulatory or other reasons, it established over 20 credit and guarantee lines to support local funding and trade finance needs. Over 60 bank guarantees subsequently had to be reissued under the new lines.
Best practice and innovation
The appointment of a full-time integration manager, who engaged with internal stakeholders, Eaton, and the five banks involved, was critical. Eaton is a US-listed company, and a global Danfoss competitor, so confidentiality and legal compliance were crucial. Danfoss included over 70% of Eaton hydraulics’ €2bn of sales into its existing cash pool set-up from day one. As Danfoss’s payment structure had to work from closing, end-to-end testing was rigorous. Payment files were sent from Oracle into Danfoss’s overlay banking system, and onwards to relevant banks for iterative testing and feedback.
Key benefits
- Process efficiencies.
- Increased automation.
- Risk mitigated.
- Improved visibility.
- Manual intervention reduced.
- Future proof solution.
- Exceptional implementation (budget/time).
