Sept. 24 (Bloomberg) -- A123 Systems Inc., a maker of automotive battery systems, soared in the first day of trading on optimism that the market for electric vehicles will surge with government incentives.

A123 rose $6.79, or 50 percent, to $20.29 in Nasdaq Stock Market composite trading of more than 41 million shares. Morgan Stanley & Co. and Goldman, Sachs & Co. managed the sale of 28.2 million shares that raised about $380 million for the Watertown, Massachusetts-based company and its investors.

The initial public offering came 14 months after A123 filed to sell shares amid the worst market for venture capital-backed startups in nearly 40 years. Investors were enticed by an electric-vehicle market that may expand 700-fold in six years, said Matt Therian, an analyst at Renaissance Capital LLC.

“What’s attracting investors is an end market that’s expected to grow so quickly,” said Therian.

A123 received $13.50 a share in the IPO after raising its sale price twice this month. A123’s offering was initially priced at $8 to $9.50 share. The funds will help build a factory for lithium-ion car batteries in Michigan, the company said today in a securities filing.

The company is in talks to end a patent dispute with the University of Texas and Hydro-Quebec over technology underlying its products, said Ric Fulop, A123’s co-founder and vice president of business development.

The global market for electric and hybrid electric vehicles was forecast to surge to $21.8 billion by 2015 from about $31.9 million this year largely because of government incentives, according to analysis by A.T. Kearney.

Government Aid

“The government is feeding the whole food chain for electric vehicles,” said Theodore O’Neill, an analyst at Kaufman Brothers in New York.

A123 is expanding U.S. manufacturing of automotive batteries in a market dominated by New York-based Ener1 Inc. and Milwaukee-based Johnson Controls Inc., O’Neill said. He has a “buy” rating on Ener1 and doesn’t yet rate Johnson Controls or A123.

A123 last month was awarded $249 million in federal stimulus grants out of $2.4 billion the Obama administration is spending on electric vehicle development. Recipients of the grants agreed to match the federal investments.

“We think Ener1 is way ahead of A123 in that they already have U.S. manufacturing,” O’Neill said.

A123 currently doesn’t get any revenue from the prismatic battery technology that automakers favor, Renaissance’s Therian said. “It’s a highly competitive space and they’re not the only one trying to build a prismatic battery.”

Foreign Competitors

Korea’s LG Electronics Inc. and Germany’s Siemens AG also manufacture battery systems for electric and hybrid vehicles, Therian said. Automakers such as General Motors Corp. and Honda Motor Co. are likely to partner with, or buy from, more established manufacturers than A123, he said.

Chrysler LLC, the third-biggest U.S. carmaker, in April said it plans to use A123 batteries for its hybrid and electric vehicles. General Motors Corp. dropped plans to use A123 batteries for its Chevy Volt electric car in favor of LG’s Compact Power Inc.

A123 also expects to borrow $235 million under a loan guarantee program from the U.S. Energy Department for advanced technology vehicle factory expansions.

The state of Michigan awarded A123 $10 million to build their facility in Livonia and offered up to $4 million in low- interest loans. Construction should be complete by the end of next year, the company said in the filing.

A123, which has never been profitable, lost $40.7 million on sales of $42.9 million in the first six months of this year. Most of the company’s battery production is currently in China.

To contact the reporters on this story: Christopher Martin in New York at cmartin11@bloomberg.net; Tim Mullaney in New York at tmullaney1@bloomberg.net.

Last Updated: September 24, 2009 16:40 EDT