A promising start-up that’s posted nothing but ever larger losses since inception, but with a high-tech “blue chip” pedigree and a promising product decides it’s time to go public. On the first day of secondary market trading its shares soar 50%. Sound familiar? In what may turn out to be the latest variation on an economic theme that has brought about some of the greatest stock market booms, busts and scandals in financial history, the shares of lithium-ion battery manufacturer A123 Systems did just that yesterday.
Founded in 2001 on the back of pioneering advances in nanoscale materials development at MIT, A123 is riding the still building wave of investor enthusiasm for lithium-ion battery manufacture. The technology of choice for storing power in electric vehicles, and with potential markets in both small-scale distributed and larger scale utility power storage as well, A123 has leveraged this R&D to land well over half a billion dollars of capital in the form of alternative vehicle technology grants from the federal government, Michigan state grants and refundable renewable energy tax credits, private equity investments from the likes of GE, and deals to supply lithium ion batteries to Chrysler and Shanghai Motors.
A123’s IPO may be the type of spark that helps reignite and propel the clean tech/renewable energy and broader financial markets to new heights and the US economy to a “low-carbon” future? Or could it be a sign that the US economy is embarking on yet another spectacular, liquidity and credit-driven cycle of boom and bust?
Big Appetite for A123’s Lithium Ion Nanophosphate Technology
Clean technology and renewable energy investment had been growing at an unprecedented clip prior to the financial markets and banking systems crash of 2008. With politicians and business leaders focusing in on the interplay between society, the economy and the environment, clean tech and renewable energy have taken on the luster of a silver bullet.
From an environmental, as well as social and economic, perspective, electricity–more specifically electricity generated from renewable resources– is being touted as the “fuel” of the future. In order to be harnessed for use–whether for transportation, subsequent grid distribution or local use–that power needs to be stored. Lithium ion batteries have been deemed the best solution on the drawing board.
A123 is at the head of the pack in the US when it comes to developing lithium-ion battery technology. In August, it was the beneficiary of a $249-million US Dept. of Energy Electric Drive Vehicle Battery and Component Manufacturing Initiative matching grant. This and a pending loan application from the DoE Advanced Technology Vehicles Manufacturing program are core building blocks underlying the financial foundation for A123’s business strategy and the construction of a battery manufacturing facility in Livonia, Michigan.
Management has attracted another $350 million in capital from private sector sector investors in addition to federal and state government grants, loans and tax advantages. GE plowed a second investment of $69 million into A123 back in April, along with the appointment of its head of technology to A123’s board of directors.
In April, A123 announced a strategic partnership with Chrysler LLC in which its “Nanophosphate” lithium ion prismatic batteries would be used in Chrysler’s ENVI range-extended electric vehicle and battery-only electric vehicle programs. A123’s nanophosphate lithium ion batteries are also being used by Delphi Corp. as part of hybrid electric automotive drive systems Delphi is supplying to China’s SAIC Motor Corp.
Rational or Irrational Exuberance?
Unheard of fortunes and gushing accolades and honors had been afforded those who have been able to successfully navigate the waters of successive boom and bust cycles in asset prices of the past two, going on three, decades–with Wall Street investment bankers and private equity financiers leading the way.
With many of them hobbled, if not wiped out, in the latest liquidity and credit-driven cycle of boom-and-bust, A123 was brought public by two of the surviving “white shoe” investment banks that brought us the “Dot.com” craze and “Sub-prime mortgage crisis”–Goldman Sachs and Morgan Stanley. Are they gearing up for a repeat?
The key may well lie with the Federal Reserve and banking system regulators and their ability to rein in excessive exuberance, speculation and misdeeds. But with the financial system all but collapsing as a result of the latest bust, the Fed and Treasury have been pumping liquidity into the banking system at an unprecedented rate– to the point where the Fed and Treasury’s balance sheets have ballooned to record levels with questionable, if not certifiably toxic, debt.
Banks are awash in funds but are reticent to lend them out or invest them in the real economy as they still aren’t sure just how much they stand to lose after the latest go-round. Right now they’re busy gaming the system–more specifically the federal government’s mortgage lending bailout programs, selling off bad assets to the Fed and Treasury while investing in new, government-guaranteed GNMAs.
A123’s IPO may be an early sign that a new wave of IPOs, stock market speculation, and a boom in stock market and asset prices is building. Or perhaps it will serve as a stepping stone on the way to building a low consumption, low carbon economy? All this also begs the question: Are succeeding cycles of excessive boom-and-bust an unchangeable aspect of our capitalist system? as former Fed chairman Alan Greenspan has been saying recently.
One thing’s for sure–there’s a lot of liquidity–that’s cash money or capital–sloshing around the world’s financial system. IPOs “manufactured” to a certain degree to run up double digit gains in their first day of trading were cheered and were signs of speculative excess during previous stock market booms. Contrary to popular opinion, it just may be that there is actually too much capital out there, or at least so much that the established banking and professional investment community just don’t know what to do with it.