(See 7/17/23 update at bottom of article) We may be heading to the finish line with regards to the Stratasys (Nasdaq: SSYS) merger. After a potentially irresistible bid from Nano Dimension (Nasdaq: NNDM) to purchase Stratasys, 3D Systems (NYSE: DDD) increased its own offer to acquire its long-time competitor.
While the cash that the company is offering Stratasys shareholders remains the same, at $7.50 per share, the number of shares they will receive continues to increase, this time to 1.5444 shares of the combined company. The total ownership of Stratasys would represent 44 percent of the resulting business, along with $540 million in cash.
A Better Offer?
3D Systems estimates the value here at a total of $24.07 per Stratasys share, just seven cents above Nano’s latest offer and a 62 percent premium from the closing price of Stratasys stock one day before it announced an intent to merge with Desktop Metal (NYSE: DM). However, the company actually believes the deal to be worth $28 per share of Stratasys based on “$100 million of mutually identified and agreed upon cost synergies.”
Not only has 3D Systems sweetened the pot, but it has also signed the merger agreement in escrow. All Stratasys has to do now is pick up a pen and sign. Moreover, 3D Systems has said that it will pay all of the termination fees to Desktop Metal to cancel its merger agreement. The company outlines a number of other benefits in the deal, including the fact that the merger isn’t subject to any debt or equity financing and that the shares will be for a U.S., rather than Israeli, company, broadening the capital markets base.
Slide courtesy of 3D Systems.
Interestingly, the deal also includes the removal of “unusual terms, including a requirement for a number of existing contracts of Desktop Metal to be modified or terminated” after its proposed merger with Stratasys. What those deals are is obviously unknown, but it would be interesting to learn what they are.
3D Systems President and CEO Dr. Jeffrey Graves underscored the value of the offer, saying, “We have continued to pursue a friendly combination with Stratasys with the objective of maximizing value for the shareholders of both companies. Multiple large Stratasys shareholders have reached out to inform us that they believe a combination of 3D Systems and Stratasys is the right path forward. This feedback affirms our conviction that we are doing right by shareholders today by offering exceptional value, certainty and transparency, and agreeing to pick up the termination fee that will be payable to Desktop Metal.”
Dr. Graves continued, “We have taken every step to improve the value, certainty and transparency of our proposal and look forward to constructively engaging with the Stratasys Board so that we can mutually pursue a transaction that will change the landscape of the additive manufacturing industry for the benefit of not only investors, but also employees and customers. We are taking this decisive action now to remove any reasonable doubt whether 3D Systems’ offer is likely to result in a superior proposal. While we believe our previous offers should have constituted a superior proposal, we are confident that this enhanced offer and signed merger agreement unequivocally constitutes a superior proposal to any other before Stratasys.”
Analyst Insight
Troy Jensen, Senior Research Analyst at Lake Street Capital Markets, provided his advice regarding the Nano Dimension offer, suggesting that Stratasys shareholders take it unless 3D Systems were to improve their own proposal. Jensen downgraded the Desktop deal to “Ugly” and upgraded the Nano deal to “Bad,” selecting a merger with 3D Systems as “Good,” stating:
“While we have liked Stratasys as a standalone investment for a variety of reasons (new product cycles, valuation, profitability) and still hope they could somehow remain independent, the question now is related to size and whether scale is needed to reach healthy profitability levels. If you believe this, it seems like 3D Systems merging with Stratasys makes the most sense.”
What Happens to Nano Dimension?
If Stratasys were to agree to a merger with 3D Systems, one wonders what would occur with the other parties, Nano Dimension and Desktop Metal. Nano Dimension still has over 14 percent of Stratasys and has put forth a vote to replace the company’s entire board with its own members, including its President, Zivi Nedivi, who previously worked alongside Stratasys Chairman Dov Ofer. The company likely wouldn’t want to let go of such a valuable asset. While its ownership would become watered down after a Stratasys-3D Systems combination, it would still have enough to rock the boat.
A Financial Times report oddly quoted an unnamed banker involved in the negotiations as saying that a merger of all three businesses is what “everyone” is aligned on. Because Nano Dimension said that it would consider combining all three, there’s still the possibility that 3D Systems would take on Nano, as well, but it has not shown any intent to do so yet.
What Happens to Desktop Metal?
Desktop Metal would also need to find some form of support, possibly by selling itself to a larger company. Because the firm began its roll up strategy after its IPO, one would expect the intention was to sell when the time was right. One possibility would be a sale to a manufacturer outside of current speculation.
Because CEO Ric Fulop’s battery business, A123, was ultimately sold to Chinese car parts giant Wanxiang, he may have some connections in Asia that would be interested in Desktop. After all, the Chinese additive manufacturing (AM) industry is growing at an aggressive rate. Bright Laser Technologies, for instance, claims 30 percent annual expansion. And because the metal binder jet market is underdeveloped compared to laser powder bed fusion, it would be sensible for a Chinese firm to purchase Desktop, giving it a solid entry into the North American and European markets.
One firm we haven’t heard from in quite a while is XYZprinting, the subsidiary of Taiwanese contract manufacturer New Kinpo Group. The company sold off its selective laser sintering (SLS) division to Nexa3D, but it has always had grand ideas for the market. After conquering the desktop space almost a decade ago, it had shown off a wide variety of industrial machines before mostly abandoning them for SLS. Perhaps XYZ would be interested in acquiring Desktop Metal to rebuild its brand. It should be worth significantly less if the merger with Stratasys falls through, allowing whoever buys it to have a significant IP portfolio and more.
Update 7/17/2023: Stratasys has announced that it would engage in discussions to merge with 3D Systems, with the Board of Directors unanimously determining that the latest offer would “reasonably be expected to result in a ‘Superior Proposal’ as defined in Stratasys’ merger agreement with Desktop Metal, Inc.” All this means is that the proposal is significant enough that the company is obligated to begin talks with 3D Systems, but that there is no assurance that the discussions will result in a merger.
Stratasys also announced that the recent partial tender off from Nano Dimension is not in the best interest of its shareholders, recommending that they reject the offer and deliver a Notice of Objection against it. The Board argued that the Nano offer “is misleading, coercive, substantially undervalues the Company as a whole.” In an investor presentation, it made the following points:
- “Nano’s partial tender means Stratasys shareholders who tender their shares may have as few as approximately 40% of their shares purchased, assuming full participation in the offer. If the partial tender offer is successful, additional shareholders are likely to tender their shares during the mandatory 4-day extension window, and shareholders may retain approximately 60% of their existing shares in a Nano-controlled Stratasys.
- The partial tender offer implies a blended value of approximately $15 to $19 per share or less, assuming full participation in the offer, given that Stratasys being controlled by Nano is likely to lead to Stratasys shareholders’ remaining shares trading at a heavily discounted level, which could be approximately $9 to $15 per share or less.
- Nano has destroyed significant value and trades at negative firm value. Yoav Stern, Nano’s CEO, cannot be trusted, has made misrepresentations about Stratasys and is not qualified to manage Stratasys. Since Yoav Stern’s appointment, Nano has spent more than $500 million in cash and increased its revenue by only $44 million.
- If the partial tender offer is successful, significant conflicts of interest would exist that are likely to be detrimental to Stratasys and its minority shareholders. Nano and Yoav Stern may not be incentivized to act in the best interest of minority shareholders of Stratasys, and Nano could block any future transaction that might maximize value for Stratasys and its minority shareholders, including Stratasys’ ability to engage in discussions with 3D Systems.”
The Stratasys Board believes that investors that don’t wish to tender their shares should still file a Notice of Objection because it could cause the entire tendering program to be terminated. It further suggests that investors vote to re-elect the existing Stratasys Board, rather than replace it with Nano’s Board, believing that the Nano team could walk away from the partial tender offer while still taking over the company.
Analyst Troy Jensen offered his opinion in a report published by Lake Street Capital, saying the following:
“We believe the combination of 3D Systems and Stratasys will create significant scale and industry leading profitability, which has been needed in the additive manufacturing industry. We continue to believe 3D Systems has repositioned itself into a pure-play additive manufacturing company and the combination with Stratasys should make it a powerhouse player in the additive space. We applaud 3D Systems’ decision to pursue Stratasys and believe CEO Jeff Graves and the talented management team at DDD will be able to properly integrate Stratasys into their operations and we wish them well in this endeavor.
“We are reiterating our Buy rating and $12 price target on DDD shares. Our price target equates to a 2.5X EV/Sales multiple applied to our current 2024 revenue assumption of $605 million. We would point out that this price target and model is based on DDD as a standalone company but would change if the Stratasys merger is completed.”
Interestingly, Stratasys’s Next Generation AM site was previously used to promote the company’s planned merger with Desktop Metal. However, dating back as least to July 2, the site shifted to primarily advertising a message to protect the company against Nano Dimension. This was two days ahead of the announcement regarding the August vote to replace the Stratasys Board with Nano representatives. Though details about the Desktop merger can still be found, it is not on the homepage and the Desktop logo has been removed from the top of the site.
Because of the Nano activity, a possible deal with 3D Systems still has some hurdles to overcome. If the Stratasys Board does determine a combination with 3D Systems is superior than one with Desktop Metal, it may still have to honor the upcoming vote regarding the Board swap. If so, it could force the consideration of a three-way merger.