A123's Story Ends With A Zero

By Stephen D. Simpson, CFA | December 12, 2012 AAA

With the Chapter 11 bankruptcy auction of defunct battery developer A123's (OTC:AONEQ) commercial assets now complete, the story is over and common shareholders will walk away with a total loss. Not only does the A123 story serve as a bitter reminder of the sizable hurdles that new energy-tech companies must face, but also the dangers of buying into the hype at the cost of scientific and economic realities.

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Wanxiang Walks Away with the Assets
With the completion of the auction of A123's commercial assets this weekend, China's Wanxiang has emerged as the winner. Despite expressions of interest from Siemens (NYSE:SI) and Johnson Controls (NYSE:JCI), nobody was willing to top Wanxiang's $257 million bid, who have agreed to fund their subsidiary Wanxiang Clean Energy USA Corp with about $350,000,000 in cash prior to or at the closing of the asset acquisition.

Assuming that the bankruptcy judge approves the transaction (and there's little reason to expect otherwise), the deal will go through. Unfortunately for shareholders, A123 went into bankruptcy with about $376 million in liabilities and between the Wanxiang bid and a trivial amount agreed to in a separate deal for A123's military/government-related assets, there will be over $100 million in net liabilities left, meaning that shareholders will get absolutely nothing in the liquidation.

Should Johnson Controls Have Stepped up?
I do find it somewhat interesting that Johnson Controls didn't try harder to win these assets. Johnson Controls is also working on advanced lithium-ion batteries for the automotive market, and certainly could have used A123's lithium nanophosphate technology.

While there were clearly problems with A123's cost structure, the technology still holds promise. Advanced automobile manufacturer Fisker has already leaned heavily on A123's technology, and major automakers like GM (NYSE:GM) and Fiat's (OTC:FIATY) Chrysler had shown more than just passing interest in the technology. With Johnson Control's better scale and ongoing development budget, I believe the company could have taken the technology in some interesting (and, ultimately, profitable) directions.

Clearly Johnson Controls thought so too, to a point. Johnson Controls had initially reached an agreement with A123 to buy these assets in bankruptcy for $125 million (and debtor-in-possession financing), only to be outbid in the auction. By no means do I wish to criticize Johnson Control for showing price discipline, but I have to ask whether an extra $130 million, or so, really should have been a deal-breaker and whether they can replicate or surmount A123's technology for that incremental sum.

A123's Story Is All Too Familiar
Although the A123 story should be a lesson to future energy-tech investors, I have been doing this too long to really believe that it will be. Time and time again, investors get caught up in the excitement and potential of new energy stories without appreciating the sizable hurdles in technology, engineering and commercialization.

It wasn't so long ago, really, that companies like Ballard Power (Nasdaq:BLDP), Beacon Power (OTC:BCONQ), Mechanical Technology (OTC:MKTY), Active Power (Nasdaq:ACPW) and Plug Power (Nasdaq:PLUG) were "going to change everything." Unfortunately, none of these companies have really made much of a mark and the sum total of their market caps today is less than what Wanxiang is paying for A123's assets.

In the case of A123, investors underestimated just how difficult and expensive it is to develop differentiated battery technology and just how risk-averse automobile OEMs can be when it comes to incorporating new technology. Likewise, A123's management wasn't always exactly rational about its own prospects - Wanxiang had offered A123 $465 million for a controlling interest, a pesky surplus item on an income statement, not all that long ago but A123 refused.

The Bottom Line
There are plenty of lessons to take from the A123 story, and many questions still worth asking. Why wasn't Johnson Controls willing to go higher in its bid? Are Chinese companies like Wanxiang and BYD (OTC:BYDDY) really establishing themselves as potential players in electric vehicles down the road? Will investors ever learn that buying stock in bankrupt companies is virtually always just a ticket to a total wipeout?

Whatever the case may be, A123 now solidifies its place in history as another risky tech stock that simply couldn't deliver on the promise of its patents and technologies.

At the time of writing, Stephen D. Simpson did not own any shares in any company mentioned in this article.

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