The A123 End Game
Earlier this week, A123 Systems filed for bankruptcy protection, having run out of the cash necessary to pay its debt obligations. The filing included a “stalking horse” bid by Johnson Controls, to purchase the bulk of A123’s assets for $125 million and to provide A123 with a debtor-in-possession line of credit of up to $72.5 million.
A123’s decision to put Johnson Controls forward as the stalking horse bidder (which provides Johnson Controls with an initial advantage in any bidding for A123’s assets) was a clear rejection of previous efforts by Wanxiang Group Corp., China’s largest auto-parts maker, to acquire control of A123. On August 16, Wanxiang had announced that it would attempt to acquire up to 80% of A123 for up to $465 million.
On Wednesday, in response to the Johnson Controls stalking horse bid, Wanxiang said that its interest in A123 was undiminished and that Wanxiang would make a competing offer for A123’s assets. Rumors suggest that other bidders may soon come forward as well.
The maneuverings in bankruptcy court occur against a backdrop of harsh criticism in the media and in Congress. The criticism includes accusations that A123’s bankruptcy signals the failure of government efforts to support advanced battery technology in the United States and that Wanxiang’s bid represents an undesirable attempt by China to acquire U.S. battery technology. Neither accusation has merit.
The bankruptcy of a grant recipient is a poor way of judging the success of a government grant program intended to support new technology. The battery manufacturing grant program, which awarded $249 million to A123, was never designed to aid the stockholders of individual companies (or never should have been). Government has no business picking winners and losers in the commercial marketplace. The government has, however, an important role to play in helping to advance new technologies. The proper measure of success for a government technology grant program is whether it advanced the targeted technology, not who ends up owning that technology.
Over the past three years A123 Systems made great progress in developing lithium iron phosphate cells and manufacturing complex battery systems. It is a shame that A123 stockholders will not see the benefit of those efforts. But if the country eventually sees the benefit, because a successor company is able to build successfully on the initial work of A123, taxpayer money will have been well spent.
Criticism of Wanxiang’s efforts to acquire A123 because Wanxiang is a Chinese company is also off the mark. Those critics have forgotten that a large portion of the battery manufacturing grants originally went to companies headquartered outside the United States, in France, South Korea and Japan. Business today is international. Both Wanxiang and Johnson Controls have operations in China and in the U.S. Both are driven by the need to maximize profits for their stockholders. There is little reason to believe that one more battery cell will be manufactured in the United States, or that one less cell will be manufactured in China, based upon which of the two companies acquires A123’s assets.
The most significant difference between the Johnson Controls and Wanxiang bids for A123 from the standpoint of U.S. taxpayers lies in the nature of those companies rather than in where they are headquartered. Advanced battery technology still needs significant development and improvement before electric vehicles can be made attractive to mainstream American consumers. This will require a lot more support for basic battery research and vibrant, long-term corporate R&D programs in the battery area.
Johnson Controls is well known for its devotion to research and development and its support for basic scientific research. Johnson Controls has good relationships with several of the national laboratories and a history of supporting university research in the battery area. By contrast, Wanxiang is a relatively new player in the American market and the role and status of research and development within its internal corporate culture is largely unknown.
For A123 not to be a failure for U.S. taxpayers, the battery development work started by A123 must be supported and continued by whoever acquires its assets. The winner in the auction for the A123 assets that is now unfolding will be determined by bankruptcy court rules, which seek to maximize the financial recovery of the debtor’s creditors. But the bankruptcy court should consider that U.S. taxpayers are also creditors, in a sense, of A123. Maximizing their recovery requires putting A123’s assets into the hands of the successor that will most vigorously support future development of the advanced battery technology begun by A123 Systems, for which U.S. taxpayers have paid so dearly.
Image: Lithium Ion Battery via Shutterstock