The mergerocalypse surrounding Stratasys and Desktop Metal is becoming much more fraught than many of us likely expected. However, if you look at the build up that led to announcement that those two firms would be merging, you see that it has been complicated from the start. Now, Stratasys is facing yet another foe in its attempt to combine with the smaller Desktop Metal. An institutional investor with 2.3 percent of Stratasys’s outstanding shares, the Donerail Group LP, has published a letter directed to the 3D printing company’s Board of Directors.
Donerail’s Letter to Stratasys
The letter argues that Stratasys isn’t adequately considering offers from its long-standing competitor 3D Systems, among others. It suggests that the company isn’t acting in the best interests of its shareholders, which is, of course, up for debate. Specifically, the note reads:
“As the Company disclosed in a June 20th regulatory filing, since January of 2021, Stratasys has been on the receiving end of at least 12 unsolicited acquisition proposals from at least 3 separate bona fide acquirers. We also believe that the Board would receive additional acquisition interest if it would indicate a willingness to seriously entertain it. Implied acquisition premiums of the disclosed 12 unsolicited acquisition proposals have been attractive, with one proposal exceeding over 60% from the trading price at the time of the offer. In 11 of those 12 unsolicited acquisition proposals, Stratasys rejected the unsolicited proposal without engagement. Such blind and inconceivable rejections have cost Stratasys shareholders dearly.”
The letter claims that Donerail has already met with Stratasys CEO Yoav Zeif and attempted to communicate with the Board.
“As you are also aware, since our meeting last week with the Stratasys CEO, Dr. Yoav Zeif, we have attempted on multiple occasions to call a private meeting with the members of the Board of Directors (the “Board”) responsible for strategic initiatives to highlight our views of value of the various strategic options. Our meeting requests have been categorically ignored, leading us to release this letter publicly.
“To be sure, we have appreciated the meetings with members of the Stratasys management team in recent weeks, but we have found that our most recent meeting, alongside certain details disclosed recently in regulatory filings, have introduced a heightened level of concern regarding the Company’s governance and strategic direction.”
Donerail and Turtle Beach
After learning about the investors that have been troubling Nano Dimension, it would behoove the 3D printing industry to look at Donerail. From what we can tell from public records, the hedge fund only has shares in one other company, the leading gaming accessories manufacturer Turtle Beach Corporation (Nasdaq: HEAR). Beginning in 2021, Donerail performed similar actions against Turtle Beach, of which it owned almost eight percent at one point. Claiming that the peripherals company wasn’t performing well financially, Donerail offered to buy it out. When that was rejected, it sought to remove members of the Board and replace them with its own candidates. This resulted in a successful vote by shareholders to do just that.
The Turtle Beach board said that it had engaged in open talks with Donerail, but that the activist investor was uncooperative and failed to even provide evidence of being a legitimate business. Turtle Beach CEO and chairman Juergen Stark wrote in a Section 14A filing with the SEC:
“The Board’s openness to value-maximizing opportunities also included our full and good faith engagement with Donerail, where we tried repeatedly to establish their financing and make their bid real and actionable… Despite our efforts, Donerail could not, or would not, verify their financing, unlike credible potential buyers.”
Turtle Beach accused Donerail of misleading statements and actually disrupting acquisition offers. Stark wrote:
“Additionally, it is important to note that feedback from multiple prospective acquirers has been that Donerail’s dissemination of false and misleading information about the Company, which started mid-2021, has unfortunately deterred and discouraged them from advancing discussions with us.”
Rather than keep fighting and possibly lose a shareholder vote, Turtle Beach ultimately allowed Donerail to select three to five individuals to be added to the board. As of May 2023, Turtle Beach went so far as to add Donerail’s Chief Investment Officer, William Wyatt, to its board.
Starboard Value, a fund management company where Wyatt served as head of Event Driven Investing, pursued a similar strategy with file sharing site Box and chemical company Huntsman, but failed in its attempts to take over the boards. However, it hasn’t always been unsuccessful in these moves.
Given its history with Donerail, this is a troubling sign for the 3D printing stalwart. About eight percent of its shares were sold during Nano Dimension’s first special tender offer period, with Nano already owning about 14 percent of the company. As I mentioned in a previous article, other troublesome shareholders could begin making trouble for Stratasys and it looks like Donerail is one of them. Could one of the industry’s most successful companies experience a shakedown by activist shareholders? That outcome seems quite possible.