The recent initial public offering of A123 Systems (Nasdaq:AONE) may have caused a temporary investor flashback to the days of the Technology bubble as the stock moved 50% higher on its first day of trading. Investors should wade carefully before deciding that the boom times are back.
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The allure this time around is not the "new era" mentality that dominated thinking back in the late 1990's, but is centered on the emerging green tech industry of alternative power and other products that are being pushed by governments around the world.
A123 Systems is a manufacturer of lithium ion batteries for use in the upcoming generation of electric and hybrid electric vehicles. The size of the total advanced battery market was only $498 million in 2008, but is estimated to grow to $3.1 billion in 2013. Lithium ion batteries are expected to be 70% of this market.
The company sold 28.1 million shares in its IPO at $13.50 per share raising approximately $380 million. The underwriter has an over allotment option to sell another 4.3 million shares. The company only expected to receive $250 million in the offering.
A123 Systems has some prominent backers. A subsidiary of General Electric (NYSE:GE) has invested a cumulative total of $70 million in the company through April 2009.
There are issues with A123 Systems. Its initial business model is based on government subsidies, and the question must be asked about whether the company is viable long term without those subsidies.
The company received a $249 million grant from the Department of Energy (DOE) under the U.S. Electric Drive Vehicle Battery and Component Manufacturing Initiative. The grant, which must be matched by the company, is to build a lithium ion battery manufacturing facility in the United States. The company has chosen Michigan as the location, and also received $100 million in refundable tax credits from that state.
The company has accumulated losses of $146 million since its inception. This is not unusual any longer as the days when underwriters wouldn't touch an unprofitable company are long gone.
A123 also has competition in the Lithium battery business. Ener1 (NYSE:HEV) has been public for years and built a facility in Indiana.
Another IPO coming to market soon is Shanda Games Ltd (Nasdaq:GAME), a Chinese online gaming company that will be priced shortly.
The Bottom Line
Investors gave a royal welcome to A123 Systems on its first day of trading, something that the IPO market hasn't seen much of lately. It isn't clear yet if this courtesy will be extended to all upcoming IPO's during the balance of 2009. (To learn about the IPO process, check out our IPO Basics Tutorial.)
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