In the space of six years, M&As have grown from $134 million in 2007 to $10.6 billion in 2011 to a near doubling in the value of deals at $19.5 billion in 2012. Both the growth and now scale indicate the supply side is gearing up to meet the requirements of new technology and forecast demand for pure smart grid products and systems that will require a global investment of some $2000 billion over the next 20 years.

Smart grid business is only in its infancy but strategic acquisitions are regarded as critical to grow and increase market share. In 2012 merger and acquisition activity increased by 84%. This is a remarkable performance given that the total value of M&A business across the world declined and is proof enough that smart grid has both the backing of the financial market and the suppliers even in a difficult economic environment.

This massive increase of almost 84% is the result of 3 major deals; the first being the acquisition of Cooper Industries by Eaton Corporation for $11.8 billion, Thomas and Bett at $3.9 and Elster at $2.3 billion. The first deal in particular has distorted the picture because the total number of deals declined in 2012 to 45 from 55 in 2011. So going forward this could produce a volatile market but with a clear underlining trend for increased activity.

Cash has financed up to 90% of the purchase price from 2007 to 2009 which is much higher than normal. In 2012 this fell to 55%. We expect this figure to be around 75% by 2017 as the volume of deals increases but the average price falls significantly. If M&A growth exceeds our forecast levels then we should expect merger and stock-for-stock deals to take a much more important role and ease the burden on financing deals.

The deceleration in World GDP growth from a 3.8% rate in 2011 to 3.2% in 2012 reflects the decline in the total value of M&A business with deals falling from $3,393 billion in 2011 to $3,143 billion in 2012. However, as we have seen M&A activity by value in smart grid almost doubled in 2012 due to one massive deal that accounted for over 50% of the business. But this is not likely to be an annual event.

If we take into account the distortion caused by the Cooper Industries acquisition, purely economic factors would suggest that total M&A activity will remain flat. But we believe that the underlying trend in smart grid acquisitions will deliver growth picking up from the 2010 / 11 figure through to 2017 when we forecast in that year $13.75 billion of M&A deals. This is because demand for smart grid is growing and the suppliers and financiers are currently confident about the future. This fledgling business will need further consolidation to deliver scale and acquire new technologies.

The chart below shows how the acquisitions broke down by type of business over the three year period from 2010 to 2012. In a nutshell over this period:

27 monitoring and control products companies were acquired, making it by far the most popular acquisition target. But this trend slowed down in 2012.

Communications and networking products and services had 18 deals rapidly increasing its share of the business and a good proportion of these were companies external to the electrical transmission and distribution business (and also high-value transactions). In addition, wireless communications were in 11 deals over the three-year period and we anticipate this sector will continue to be a leading acquisition target.

AMI and smart meter companies accounted for 15 acquisitions over the three years, representing the fourth most popular target. Yet its share declined markedly in 2012.

Demand side management software had nine deals and was also down in 2012, but it should be noted that some companies acquired in our energy management and control software group also deliver these services but we only list them in one group.

Business enterprise software companies were targeted 15 times over the three years and demand for these companies more than doubled in 2012 despite the fact that the total number of deals was down.

Transmission and distribution equipment was involved in six strategic buys with the Areva sale in 2010 making $6.25 billion and Cooper Industries in 2012 realizing $11.8 billion. These two deals account for almost 45% of the total spend on acquisitions over the last three years.

Demand response automation accounted for nine deals over the three-year period and those independent companies that remain will be sought after.

The smart grid badly needs the IT & Communications (ITC) companies' technical expertise in collecting the vast quantity of data and making it actionable. In addition, ICT companies have their eye on the Internet of Things (IoT) space and this is a very strong attraction for entering the smart grid space. We believe that ultimately they will play a major part in operating the business enterprise aspects of smart grid -- even financing and operating these services.

Strategic buys by public companies external to the smart grid industry accounted for 23% based on the number of deals in 2010, 18% in 2011 and 16% in 2012. We suspect that by value their share of the spend on acquisitions would have been at least a few percentage points higher. More significantly however is that as a proportion of the acquisitions made in the product sectors, communications and networks, wireless networks and business enterprise software accounted for almost 40% of the deals in 2012. But the majority of these were strategic buys from within the industry.