Before we answer the question posed in the title of this piece, let's paint in some of the background of the smart grid business.
Last month on our blog, we posed the question: will smart grid outperform its cleantech cousins and become the jewel in the industry's crown? We concluded that for a number of reasons, smart grid offers a less risky investment to both financers and players, and that there is a growing trend among investors to move away from the highly capitalized sectors of the renewable market in favor of smart grid.
Not all sectors of the smart grid are as capital intensive, and as we showed in the April report "Smart Grid is Just Too Big for the Utility Companies to Finance and Manage," the industry will require some nurturing to overcome some of its growing pains. We concluded that the electrical utility industry will likely be required to invest massive sums of money, and while they may be able to justify this based on long-term projections, it remains to be seen whether they will be able to find the money to fund such an effort. It cannot be generated from cash flow alone and government subsidies are unlikely to continue at their present level of generosity.
However, in the case of smart grid, there is another solution in the shape of the IT and communications companies. They will be more than willing to invest their capital and expertise in the smart grid information and communications infrastructure, generating revenues from a plethora of value-added services. This would relieve the utility companies of the major responsibility of finding the funds and toiling in an area in which they have little expertise. In our March issue, in an article contributed by Microsoft entitled "Smart Grid Revolution Becomes Disruptive for Utilities," the IT giant kindly shared some of the findings of a study they had commissioned. Expect regular promptings from the IT and communications industry about the major contributions they can make to the future of smart grid. This industry offers enormous potential and a robust business case that will continue to attract well-managed, innovative companies, financing and some government support all over the world.
On this occasion, we shall judge performance based on business growth and by how well players are developing the business opportunities available to them.
In the last six months, we have been collecting and analyzing data on four benchmarks that play a major part in maximizing industry performance. These are: merger & acquisition activity, forming alliances to share technologies and markets, attracting financing to invest in new products, and finally, reviewing company financial performance. The results show, based on the last six months' figures, that smart grid suppliers are working hard on a number of strategies that can deliver new business opportunities.
This month we have identified eight acquisitions by companies actively involved in the smart grid business. This is, so far, the largest number recorded in any single month since we started reporting six months ago. Since our first published edition in March, we have identified 26 deals through the end of June of this year. In the first two months of this year, we noted 13, bringing the total to 39.
We have searched back to June 2007 and identified 23 significant acquisitions during the two-and-a-half year period ending December 2009. While this analysis will almost certainly have missed some major deals, we think that these numbers provide sufficient evidence to show that there has been a significant trend in the growth of consolidation in the smart grid business during the last year and particularly in the last six months. In addition, we can say that for an industry of this size and in its early stages of development, the results show a significant and relatively high volume of acquisition transactions. As such, we can conclude that this industry is definitely consolidating and producing stronger and more capable suppliers in the process.
This month we have identified eight alliance arrangements that have been formalized, bringing the total number of arrangements confirmed over the last three months to 28. In the first three months of the year, we identified 21 arrangements, bringing the total to 49 for the first six months of the year. We regard these numbers as relatively high compared with similar but larger electrical businesses, showing that the smart grid industry is working hard to maximize business opportunities.
In the first six months of this year, we identified 46 private funding arrangements, with nearly 60% of this activity taking place in the last three months. We believe that this number is relatively high compared with similar businesses in the electrical sector but is well down on deals in some other areas of cleantech business. However, the sector is buoyant and growing and it augurs well for the future. It is yet another factor that shows how companies are exploring all opportunities to develop their smart grid business.
Finally, we come to assessing the financial performance of players in the business. The financial reports from Itron, Landis & Gyr, Sensus and EnerNoc show increased revenues and profitability. Smaller specialist suppliers such as Comverge, Acorn and Tollgrade have increased their revenues, but not particularly profitably. Major electrical manufacturers such as 3W Power Holdings / AEG Power Solutions are much more a bellwether for the fortunes of the electrical transmission and distribution industry, which turned in a poor performance in 2009. The former had Q1 revenue and profits down year on year by 50% and 90%, respectively, reflecting the late cyclicality of business operations.
However, they are more optimistic about the future, with an order backlog at the end of Q1 2010 standing at €188 million, 37% higher than the end of Q1 2009. Similarly, ABB reported a decline in orders in 2009 of 19 percent (13 percent in local currencies) compared to 2008, due to (1) the global economic downturn, which has significantly weakened demand, particularly in the industrial and construction-related markets, and (2) price erosion in both utilities and industrial sectors in many geographical markets.
The only trend that we can confirm from these financial results is that specialist companies serving the AMI sectors are performing very well and are optimistic about future prospects. Smaller and less established specialists are growing but not yet profitably, but again are forecasting much better returns for 2010. The message that the major electrical giants are delivering is that they have hit the bottom of the trough and that the second half of 2010 will see increased revenues. The good news is that the cycle appears to be poised to enter an upturn this year and smart grid will also benefit in the U.S. from the additional flow of business from the smart grid stimulus funding program.
Overall, it can be concluded that the smart grid business is robust, performing well and in good shape.
Allan McHale currently advises Memoori, a business intelligence firm. Over the last 20 years, McHale has managed a wide range of marketing strategy assignments for a number of major international companies, and is the author of 40 published market studies and numerous papers on physical security, fire detection and environmental controls. He has lectured extensively on business development in the U.S., Europe and the U.K.