Stratasys Board Deems 3D Systems Bid to Be Inferior to Desktop Metal Merger

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See updates at end of this article. In what has to be one of the 3D printing industry’s biggest news weeks, additive manufacturing (AM) pioneer 3D Systems (NYSE: DDD) has made an unsolicited bid to acquire fellow 3D printing stalwart Stratasys (Nasdaq: SSYS). The story comes after Stratasys announced an intention to merge with AM startup Desktop Metal (NYSE: DM). In a press release put out after market closing today, Stratasys said 3D Systems proposed to acquire it for $7.50 in cash and 1.2507 newly issued shares of common stock of 3D Systems per ordinary share of Stratasys

Potential Desktop Metal-Stratasys Merger

The proposal is part of a somewhat drawn-out story that has been developing over the course of the past year and beyond. As discussed in a recent episode of the Printing Money podcast, there has been pressure placed on Stratasys to fight off a hostile takeover from the much smaller Nano Dimension (Nasdaq: NNDM). This latter firm has its own complex track record that includes in-fighting with its largest shareholder, among other things.

With over $1 billion in cash, the Israeli electronics 3D printing firm has promised investors it would spend the money to make a big move, which materialized as the attempted purchase of Stratasys. By merging with Desktop Metal, a deal that was meant to take place by the end of 2023, Stratasys would dilute Nano Dimension’s shares purchased on the open market, which accounted for about 14 percent ownership of Stratasys and gave it leverage in its attempted buy-out.

The potential merger between Stratasys and Desktop Metal had its own protractors and supporters. Also detailed in the Printing Money podcast, such a deal would seem to benefit Desktop Metal, which has been burning cash while on its way to profitability, by ensuring safety in the warm embrace of a much larger company. Stratasys is said to be one of the more stable firms in the AM industry, generating some $627 million in 2022.

However, it is worth noting that by possibly purchasing Desktop Metal in an all-stock deal for roughly $600 million, it would not only be buying Desktop Metal but also the firms it had acquired, including metal binder jetting pioneer ExOne, which Desktop itself had bought for roughly $561.3 million. On top of that, Stratasys would also obtain EnvisionTEC, the inventor of digital light processing (DLP) technology. According to an informal social media poll, 52 percent of 42 respondents believed the deal favored Desktop, at the time of this writing, while about one-quarter thought it was bad for both firms. Less than one-quarter thought it was beneficial for all.

3D Printing Portfolio Overlap

A deal with 3D Systems at the current values of the companies would potentially represent $1.225 billion, less than the total $1.8 billion estimated for the Desktop merger. There are some synergies that could result from a Desktop deal, such as introducing a metals portfolio to Stratasys’s polymer focus, but there could be some excess in the merger, as well—namely when it comes to DLP, as Stratasys already owns a DLP line.

3D Systems has the broadest technology portfolio as it stands, with fused deposition modeling (invented by Stratasys) and inkjet (invented by Stratasys via Objet), as well as stereolithography (now also included in the Stratasys portfolio via RPS). It also manufactures selective laser sintering machines, which compete with Stratasys’s own polymer powder bed fusion technology, selective absorption fusion. 3D Systems has also begun developing its own LCD-based polymer technology, similar to what Stratasys offers via its Origin acquisition.

3D printed dentures made using Stratasys PolyJet.

In other words, there is a great deal of overlap in such a merger. The largest differentiator would be metal powder bed fusion and bioprinting from 3D Systems. Stratasys’s inkjetting technology is also much better than that of 3D Systems by leaps and bounds. Altogether, a merger with Desktop would expand Stratasys’s portfolio in a way that would generate less excess fat than one with 3D Systems. Other details worth noting are the fact that, while 3D Systems has a higher market cap than Stratasys, the latter firm has consistently traded at a higher level than that of its competitor. Meanwhile, Stratasys also generates higher revenues.

An Unclear Path Ahead

After news of the possible merger between Desktop and Stratasys, Nano Dimension made a partial tender offer to purchase ordinary shares of Stratasys for $18.00 per share in cash, which the Stratasys Board of Directors determined to undervalue the company. The Board suggested shareholders reject the offer and deliver a Notice of Objection. As surprising as the latest development may be, it is certainly beneficial for traders related to these companies. Stratasys stock rose nine percent in after-hours trading, while Desktop shares dropped one percent.

Clearly a lot is happening behind closed doors here and, while much of the pressure related to these proposals seem to be stemming from Nano Dimension, it’s quite possible that there are other powers waiting in the wings. Who those players may be is difficult to determine. They could be related to the largest firms in AM, like GE, Nikon, and HP. Or there could be other manufacturing businesses looking to enter the market and, thus, triggering these smaller fish to react. Where do Warren Buffet, Cathie Wood, and Elon Musk stand in all of this?

As I mentioned in regards to the Stratasys-Desktop proposal, I think that the biggest deal in 3D printing this year has yet to be announced. Regardless of exactly what occurs as a result of this, it will have a significant impact on the AM industry.

Update 6/2/23: In a press release issued on June 6, 2023, 3D Systems confirmed that it had proposed a cash-and-stock merger with Stratasys, arguing that both companies and shareholders would benefit more than they might in a Stratasys-Desktop merger. With each Stratasys share converted into $7.50 in cash and 1.2507 newly issued shares of 3D Systems common stock, Stratasys shareholders would own 40 percent of the combined company and take home $540 million in cash. The proposal was delivered to the Stratasys Board on May 30, 2023. 3D Systems argued:

“Based on a set of illustrative assumptions[2] and assuming approximately $100 million in run-rate cost synergies, the combined company is positioned to deliver at least a total value in excess of $1,840 million to Stratasys shareholders, approximately $740 million in excess of Stratasys’ fully diluted market capitalization using a 60-Day VWAP as of May 24, 2023, the last trading day prior to Stratasys’ announcement of its proposal to acquire Desktop Metal, corresponding to approximately $25 per Stratasys share, or an approximately 70% value uplift.”

The press release went on to highlight a number of benefits from a merger, including an increased AM portfolio and ability to invest in more research and development. In a published presentation on the subject, 3D Systems highlighted that the company has a unique regenerative medicine portfolio not found with other AM companies. Additionally, the company suggested that merger would result in “$100 million in estimated cost synergies” and a 75 percent improvement of Stratasys stock price. 3D Systems estimates $1.3 billion in revenue and $121 million in free cash flow for 2024 for the combined entity. The company also suggested that the deal would move quickly and with certainty, including the ability to obtain regulatory approvals quickly. How it can promise such approvals is difficult to determine.

“The combination of 3D Systems and Stratasys is simply the best outcome for the shareholders of both companies. We feel strongly that now is the time for all parties to recognize the overwhelming logic of our two businesses coming together. We are in a unique position to move with confidence and speed and we encourage the Stratasys Board of Directors to engage with our proposal and make this combination a reality for the benefit of the shareholders, employees and customers of both companies,” said President and CEO, Dr. Jeffrey Graves. “We are at an inflection point in our industry, and we see significant upside for our shareholders and all stakeholders by capturing the benefits of scale, enhancing investment in innovation and delivering long-term profitable growth. We know and respect the Stratasys business and the people who make it a success around the world. We are committed to creating a combined platform that enables these two great companies to serve our global customers and lead the industry with innovative technology offerings.”

Industry members are already weighing in on recent developments, with some arguing that such a merger would limit innovation in 3D printing, due to decreased competition between the two largest pure-play AM companies. Additionally, the need to focus on integration could reduce energy dedicated to improving existing technologies.

Update 6/20/23: After reviewing the deal and consulting with tis exclusive financial advisor, J.P. Morgan, Stratasys has announced that its Board of Directors has unanimously determined 3D Systems’ acquisition proposal not to be a “Superior Proposal” and was insufficient to enter into discussions. The Stratasys Board has so far not changed its “unanimous approval, recommendation and declaration of advisability of the previously announced transaction with Desktop Metal.”

Stratasys also published a pre-recorded audio webcast to discuss the details of 3D Systems’ proposal and the pending combination with Desktop Metal at 10:30 am ET on June 20, which will be available at the company’s investor relations website and at this link. A website dedicated to the topic also includes a presentation to accompany the call, as well as reasons to reject Nano Dimension’s partial tender offer to takeover the company.

Moreover, Stratasys has filed a preliminary Form F-4 with the U.S. Securities and Exchange Commission, along with revenue and EBITDA estimates regarding the proposed combination with Desktop Metal.

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