Contact: Mark Fontecchio
Active Power, which produces flywheel-based uninterruptible power systems (UPS) for datacenters, is seeking a buyer. In conjunction with a dismal Q2 earnings release, Active Power announced that its board is reviewing “strategic and financial alternatives” that could include new investors, pivoting to a different business or selling the company. However, based on its own financial performance as well as previous transactions in this niche market, any deal would be a tough sell for Active Power. It currently sports a market cap of just $9.5m, having lost about two-thirds of its value so far this year.
The stock’s slump has mirrored the company’s declining financial performance. In the first half of 2016, Active Power’s revenue has plummeted 45% year over year to just $16.4m. More alarmingly, losses more than tripled to $5.7m, leaving it with only about half as much cash as it had two years ago. While large orders for backup power systems can significantly affect short-term results, the company’s financial performance over the past year shows uninterrupted red ink and a dipping top line.
Active Power says deferred deliveries and delayed orders were cause for the decline. This is just the latest indication that flywheel-based UPS are not yet widely accepted. Despite their smaller footprint and longer lifetime, there is a combination of resistance to change in the datacenter industry, a fear of shorter ride-through times compared with batteries, lower availability in the channel, and the fact that financial prudence is still rather new to datacenter operations. Further, the smaller flywheel-based UPS vendors have been at a competitive disadvantage as they have gone against giant battery UPS sellers such as Schneider Electric and Emerson Network Power.
The difficulties around selling flywheel UPS have already pushed two small companies into what appear to be distressed deals. Pentadyne’s disintegrating sales led the company to divest its manufacturing business in 2010 to Phillips Service Industries, a government contractor that was one of its customers. It was rebranded and now sells as POWERTHRU. Meanwhile, in 2014 Vycon sold to and is now a subsidiary of Calnetix, which makes generators and other power systems in and out of the datacenter.
As for who might acquire Active Power, we struggle to come up with many buyers. Private equity firms might view the company’s offering as ‘tried and failed’ and it could also be suffering from pitch fatigue as it’s been in the market for about 20 years without a breakthrough. Major industry players such as Schneider Electric’s IT division, Emerson Network Power and Eaton might have even less appetite, as Active Power’s flywheel competes head-on with battery UPS. We see two potential avenues for Active Power to pursue beyond datacenters: generator manufacturers and vendors with a focus on micro-grids.
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