Will car battery maker A123 Systems jump start the IPO market?
A car battery maker based at the Massachusetts Institute of Technology is poised to jump start the market for initial public offerings (IPOs).
The company, A123 Systems (AONE), makes batteries for electric cars, went public Thursday morning at $13.50 a share, with the goal of raising $380 million. A123 -- which counts General Electric (GE) and Motorola (MOT) among its backers -- got started in an effort to commercialize nanotechnology research at MIT. And it's just won a $250 million grant from the federal government to build a production facility outside Detroit.
Regrettably, it suffers from one little problem: it is losing lots of money. Specifically, it lost $40 million in the first half of 2009 on $43 million in sales, and lost more than $80 million last year on sales of $68.5 million. It faces significant competition from companies in Asia -- including Korea's LG -- which beat out A123 for a contract to make batteries for General Motors' Chevy Volt.
Another problem that could turn out to be an opportunity is that A123's market is small. According to A.T. Kearney, the batteries A123 sells compete in a market that is expected to generate a mere $31.9 million in 2009 sales. But it is forecast to grow quickly to $21.8 billion by 2015 and $74.1 billion by 2020. We'll see.
I'd hesitate to buy this stock at the IPO price but with its backers making huge returns -- VC North Bridge Venture Partners' shares could be worth $121 million, GE's could be valued at $114 million, and Motorola's: $73 million. If A123's management could use the proceeds to help win more commercial deals, the company might become profitable. And the IPO could help revive interest in venture capital and IPOs.
It would be even better, of course, if the IPO could help generate the enthusiasm needed to create a network of industries growing rapidly to meet an enormous, unmet social need. In my view, the single most important hope for our economy is a revival of the kind of venture-backed technology-based innovation that's been missing in this lost decade.
Update. A123's IPO was a big success -- the stock closed up 54 percent at $20.78. I hope it can earn its way into that valuation.
Peter Cohan is a management consultant, Babson professor and author of eight books including, You Can't Order Change. Follow him on Twitter. He owns GE shares and has no financial interest in the other securities mentioned.