FOOL PLATE SPECIAL
Ballard Powers Up Mergers

Ballard Power announced today that it will buy the fuel cell subsidiaries of DaimlerChrysler and Ford, while the automakers will increase their investment in, and reliance on, Ballard. The merger activity will consolidate Ballard's lead in the fuel cell market, though there still remain great hurdles in making fuel cells commercially viable.

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By Paul Larson (TMF Parlay)
October 2, 2001

[This article was updated on Oct. 4. Once the mergers are complete, Ford will own 19.5% of Ballard, not 18% as originally reported.]

There were some interesting developments in the alternative energy market today, as leading fuel cell maker Ballard Power (Nasdaq: BLDP) announced not one, but two major acquisitions of subsidiaries of its partners DaimlerChrysler (NYSE: DCX) and Ford (NYSE: F). Ballard led the market for clean-burning, energy producing fuel cells yesterday, and these mergers will only serve to extend Ballard's lead tomorrow.

The nuts and bolts of the acquisitions find Ballard consolidating a tangled web of fuel cell partnerships owned by Ballard, Daimler, and Ford. Ballard will purchase XCELLSIS, which is primarily owned by DaimlerChrysler. (Ballard and Ford also own minority stakes.) Ballard's other acquisition will be Ecostar, primarily owned by Ford with Daimler and Ballard holding minority stakes.

Once the mergers are complete, DaimlerChrysler and Ford will have most of their alternative energy operations under Ballard Power's roof. The former companies ownership interests, meanwhile, are set to increase: When all is said and done, DaimlerChrysler will own 23.6% of Ballard, while Ford will own 19.5%.

The ownership stakes will increase because Ballard is issuing stock to pay for the transactions. Ballard will issue some 18.4 million shares to pay for XCELLSIS and Ecostar, making the mergers worth nearly $400 million. Ballard's total shares outstanding will jump just over 20% when the mergers are completed.

Extending the lead
With Ballard's stock up over 10% this morning alone, the market clearly likes what it sees. The acquisitions will clearly extend Ballard's lead in the fuel cell market: Not only will the company's product portfolio be widened and Ballard be more vertically integrated, but the merger will greatly fatten Ballard's technological prowess and patent portfolio. Ballard had 550 patents related to fuel cells before the deal, a number that will more than double to over 1,200.

Ballard will also get a significant cash infusion from Daimler and Ford. Combined, the automakers will invest an additional $69 million in Ballard, which will only add to Ballard's impressive war chest.

The automakers have extended not only their investment in Ballard, but also their operational dependency. The new 20-year alliance between Ballard and both Daimler and Ford will be much simpler -- and cheaper -- than the old alliance, and seemingly assures Ballard of customers when its automotive fuel cells are ready for the market, hopefully sometime in the next two to four years.

So many questions
While there are clearly positives for Ballard in the mergers, many questions about the company and the fuel cell market remain largely unanswered.

Perhaps the largest mystery with today's news surrounds the announcement that Ballard President and COO Kip Smith, is leaving the company "for personal reasons" after the mergers are completed. If the mergers were so good for Ballard, one has to wonder why such a high-ranking executive is jumping ship. Investors may be left to guess.

Another question arises when looking at Daimler and Ford's motivation for going forward with such a transaction: If fuel cells have such promise, why are Ford and Daimler essentially outsourcing the business and giving away their patent portfolios with relatively little struggle? The automakers will still have a stake in the fuel cell market through their ownership of Ballard, but now they will have to share the fruit of any advances.

Ballard is no doubt the leader in the market for clean-burning fuel cells. That said, the real two questions surrounding Ballard remain:

1. Are fuel cells ever going to be commercially viable?
2. Is it a market worth leading?

There remain enormous questions concerning the commercial attractiveness of fuel cells. First, there is the actual cost, which can amount to up to 100-times more than gas-burning internal combustion engines of similar horsepower. Second, there are energy efficiency concerns with fuel cells, since they still run on hydrocarbons that must be mined from the ground. In short, fuel cells are attractive for their low or even nonexistent emissions, but that reduced pollution comes with an astoundingly high price tag today.

If these hurdles can be jumped through further technological innovation, however, no company is in a better position to lead the market than Ballard.

Paul Larson was a member of the Society of Automotive Engineers in college and helped build a hybrid vehicle from scratch. Really! You can see Paul's stock holdings online thanks to The Motley Fool's progressive disclosure policy.