Bids for innovation

Two US engineering giants are locked in a battle for UK company Domnick Hunter, attracted by its commitment to R&D on niche technologies with great potential. Andrew Lee reports.

For the past month two US engineering giants have been fighting tooth and nail over Domnick Hunter, a medium-sized company based in the north-east of England. The would-be buyers are Parker Hannifin and Eaton, which between them have a stock market valuation nudging £11bn.

Like high-rollers at a casino card table, the two Americans have been raising the stakes in an effort to outbid each other and secure the shares of their UK target, a County Durham-based specialist in filtration, separation and purification technology, which has a presence in 25 countries.

Parker Hannifin kicked off the bidding in early August, offering 605p a share. Eaton entered the fray at 675p, and tabled successive offers that chased Parker Hannifin up to 680p and then 700p, which remained the highest offer as The Engineer went to press.

The company at the centre of all the fuss is hardly a household name, so what is it about Domnick Hunter that the two US groups (coincidentally both based in Ohio) are prepared to offer serious money for?

Part of the UK company’s appeal is undoubtedly its strong position in a wide range of industrial sectors — pharmaceuticals, petroleum, food, water and mining, to name but a few.

But it has also displayed that most desirable of qualities: a commitment to innovation and a willingness to put its money where its mouth is.

More than three years ago, The Engineer was first to report a breakthrough for an intriguing extension to Domnick Hunter’s filtration technology expertise — nuclear, biological and chemical (NBC) protection systems.

In a direct spin-off from its industrial technology, engineers at Domnick Hunter created a ‘regenerative’ NBC filtration system that it claimed (and still claims) to be a world first.

Existing NBC protection relied on a single carbon filter to screen out airborne threats that in the worst case can include sarin, anthrax and the plague. This is fine, until the carbon filter, which has a limited lifespan, needs replacing. To do this the unit has to be taken out of service, rendering it useless in a combat situation or other emergency.

Domnick Hunter’s solution was a twin filter-bed that doesn’t use carbon, but is instead based on adsorbent granules developed by the UK company’s R&D team. While one bed is on active duty, the other is being regenerated, ensuring that the system is constantly working at 100 per cent capacity.

The NBC technology attracted widespread interest from around the world, not least from the US, where the military quickly signed the system up for trials.

From the viewpoint of the global engineering community, NBC protection is exactly the sort of technology to get a mid-sized company noticed on the world stage.

Nobody, however, would enter such a ferocious bidding war for that technology alone. Gary Murphy, engineering analyst at stockbroker Williams de Broe, said the battle for control of Domnick Hunter arose following the convergence of a variety of factors, ranging from the quality of the company’s technology to trends in the US economy.

First and foremost, according to Murphy, the bids are testament to Domnick Hunter’s decade-long commitment to investment in technology. ‘Their R&D expenditure has been significant, and much of the industrial technology that has resulted is now being properly commercialised and is bringing in quite significant revenues,’ Murphy said. ‘They have been looking at new areas of technology involving micro-filtration and even the early stages of nano-filtration.’

Murphy highlighted Domnick Hunter’s NBC work as a particularly good example of its long-term view of technical innovation, with the company spending around £1.5m per year of R&D cash on the area, despite the fact that its commercialisation will be a lengthy, difficult process. ‘They could easily have written it off, but are committed to it for the long term,’ said Murphy.

Another element that has made Domnick Hunter an attractive proposition is its ability to focus on what it does best, while finding new niche markets for its technology. ‘If you think about the applications for filters, for example, they are almost limitless,’ said Murphy. ‘They are in the good position of having developed significant expertise in an area that can then be applied in one niche market after another.’

Murphy is also quick to praise the quality of Domnick Hunter’s management team, which he identified as another factor that makes the company an attractive acquisition for its American suitors.

However, many companies have a good portfolio of technology and are well managed. So why the intense excitement about Domnick Hunter?

One reason, according to Murphy, is the market conditions Eaton and Parker Hannifin face at home in the US. ‘We are seeing early signs that organic growth in the industrial sector is levelling off,’ said Murphy. ‘Yet these companies are generating significant amounts of cash.’

So with cash in the bank and signs that organic growth may be harder to achieve, the acquisition of companies such as Domnick Hunter is an attractive proposition to the US giants.

But the real key may lie with Murphy’s reference to the ‘almost limitless’ applications for filtration and separation technology. Domnick Hunter is not the first highly regarded specialist in the sector to attract the attention of potential purchasers this year, and it probably won’t be the last.

Eaton, for example, snapped up a US business called Hayward Filtration as recently as July. Announcing the deal — on this occasion completed without a nerve-wracking bidding war — Eaton noted that Hayward Filtration had ‘highly engineered products with a strong base of recurring sales’.

Sound familiar? Even Domnick Hunter itself has been on the acquisitions trail, buying California-based PTI Advanced Filtration last year.

In their respective offers for Domnick Hunter, both Parker Hannifin and Eaton stressed the fact that they could take the UK business’s products and technologies to new levels via their vast, well-established global sales channels.

Both American companies also talked up the extra resources they could offer to help the UK business achieve its full potential, and how they would nurture the talents of its engineers and management.

Whoever gains control of Domnick Hunter, the immediate winners will be the company’s shareholders.

More importantly, however, the real beneficiaries could be those who hold fast to the view that investment in innovation always pays dividends in the long run.