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Green Re-Run


NRO usually isn’t in the business of making stock picks, but a word of caution for anyone tempted to be swept away by the news of hybrid-car battery-maker A123’s successful IPO today: We’ve seen this movie before. Here’s the Reuters write-up of the A123 IPO:

SAN FRANCISCO (Reuters) – A 50 percent leap in the shares of lithium-ion battery maker A123 Systems Inc on their first day of trading looks likely to jumpstart the market for clean-tech share offerings.

The Watertown, Mass.-based A123 Systems is now worth over $1.9 billion, a striking valuation for a company that has yet to make a profit and still needs large-scale commercialization.

Industry executives and experts said A123’s success shows investors have an appetite for green technology companies that lose money, but have tremendous potential.

And here’s how MarketWatch reported the similarly successful debut of ethanol-maker VeraSun on the New York Stock Exchange in 2006:

NEW YORK (MarketWatch) — VeraSun Energy rallied 30% above its IPO price on Wednesday as the ethanol maker successfully wooed a weary market for initial public offerings.

VeraSun opened at $28 for an instant premium of 22% above its $23-a-share price. The stock rose to finish at $30 on brisk volume of 22 million shares on the New York Stock Exchange.

The Brookings, S.D.-based company, ranked as the second-largest U.S. producer of ethanol, raised $421 million by offering 18.3 million shares priced above the estimated $20-to-$22 range.

And here’s how the New York Times reported VeraSun’s bankruptcy last fall:

The VeraSun Energy Corporation, which accounts for roughly 7 percent of ethanol production capacity in the United States, announced that it had filed for Chapter 11 bankruptcy protection late Friday.

Shares in VeraSun were trading for pennies in anticipation of the move, which, the company said in a statement, was “precipitated by a series of events that led to a contraction in VeraSun’s liquidity, impairing its ability to operate its business and invest in production facilities.”

Among those events were the global credit crunch and bad bets on corn prices.

Why did VeraSun fail? In short, the market changed in ways that Washington policies were not designed to take into account. The industry, built around legislative mandates rather than real economic demand, was not flexible enough to adjust, and collapsed.

The takeaway: Government-created markets for money-losing, uncompetitive green-energy companies are inherently unstable.

Earlier today, I linked to a Washington Post report on a similar bubble that occurred in Spain’s government-sponsored solar-energy market. In light of the A123 IPO and the press it’s getting, it’s worth reprinting the following quote from that report:

“What they’re talking about now — creating a new sustainable economic model through alternative energy — is going to be exactly the opposite of sustainable,” said Gabriel Calzada, a Spanish economist and critic of the government’s alternative-energy policy. “You’re only going to create more distortion, more bubbles. It isn’t going to work.”

Policymakers in Washington — both parties — are determined to spend our tax dollars on these boondoggles; there appears to be little we can do about that. But we do not have to compound their folly with bad investments of our own.


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