Stratasys and Desktop Metal: Merger Off, Fulop Weighs in

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In a surprising turn of events, Stratasys (Nasdaq: SSYS) has terminated its planned merger with Desktop Metal (NYSE: DM), despite the latter’s shareholder approval. While shareholders at Desktop Metal gave a nod to the merger, a whopping 78.6 percent of Stratasys shareholders who voted voted against the terms of the deal at the Extraordinary General Meeting of Shareholders. This in-depth analysis explores the reasons behind the fallout, the financial health of both companies, and the implications for the additive manufacturing industry. Featuring an exclusive interview with Desktop Metal CEO Ric Fulop, the article sheds light on what’s next for these two key players in 3D printing.

Although disappointed, Fulop shed light on the trajectory of his company in a candid interview with 3DPrint.com. “I expected this to some extent. We had pretty good support from our shareholders,” Fulop stated. He added, “I think there’s a long history of scar tissue from Stratasys’ shareholder base, and maybe it’s a blessing in disguise. We’re excited and very bullish about what we’re doing.”

Stratasys Seeks Strategic Options

Stratasys isn’t wasting any time post-termination. The company’s Board of Directors has initiated a comprehensive process to maximize shareholder value. The scope of this strategic review could include a range of possibilities such as a new merger, business combination, or even a sale of the company.

Dov Ofer, Chairman of Stratasys’ Board of Directors, stated, “We are entering this review as the leader in the additive manufacturing space. Importantly, we remain focused on delivering value to our customers and are committed to maximizing value for all Stratasys shareholders.”

The Board of Directors has also unanimously adopted an amendment to Stratasys’ shareholder rights plan, extending its expiration date by three months. This Rights Plan aims to support the board in fulfilling its fiduciary duties by allowing it to evaluate all options for shareholder value maximization. It also aims to protect the long-term value of the company in the event of a takeover or acquisition without an equitable control premium for all shares.

The news comes after 3D Systems and Stratasys ceased their discussions over a potential merger. 3D Systems put forth a revised proposal to acquire Stratasys, offering $7 in cash per share and a 46% ownership in the combined entity. Stratasys rejected the offer, citing inadequate valuation of 3D Systems shares and reaffirming its commitment to a merger with Desktop Metal.

With the merger now off the table, Desktop Metal will be compensated with pre-agreed fees, the specifics of which remain undisclosed. Fulop elaborated on the financial standing of Desktop Metal, “We had $127 million in cash last quarter, and we’re going to get additional cash from this fee. We’re entering Q4 now with a stated goal of this being our first adjusted EBITDA profitable quarter. We’re going to be fine and keep growing our company.”

Despite the positive end cash positions, Desktop Metal may face challenges in its financial health. It has shown consistent negative Operating and Free Cash Flows, as well as escalating Net Income losses. The balance sheet is strong, with assets of $754.3 million, but there has been a year-on-year decrease. Although liabilities are low compared to assets, there’s an upward trend in Total Debt, signaling a shift towards more leverage. This makes the company’s stated aim for profitability seem ambitious given the current financial landscape.

Stratasys is also navigating through rough financial waters. The company has been experiencing negative Operating Cash Flows, which naturally raises red flags for investors. Despite these cash flow challenges, Stratasys has maintained a stable end cash position, possibly due to its financing activities. The asset base is robust, standing at approximately $1.26 billion, and liabilities are relatively low, leaving it with a strong equity position. However, the negative trends in cash flows and profitability metrics cast doubts on the company’s operational efficiency and the effectiveness of its current business model.

For these reasons, it was anticipated that Stratasys may have been able to push into profitability as arguably the most valuable company in the AM industry, possibly leveraging a Desktop merger to make it the sector’s first billion-dollar pure-play firm. 

Desktop’s Future

Looking ahead, Fulop noted that Desktop Metal has a clearly defined path. “We’re not for sale,” Fulop clarified, dispelling rumors about the company’s future. He also shed light on their innovations, mentioning their work in automotive giga casting with Toyota and Tesla, as well as other developments with companies like BMW. “Look at what we’re doing in consumer electronics; it’s going to be massive. We have a very bright future ahead of us,” Fulop confidently stated.

It was recently announced that Apple would be exploring metal binder jetting for the production of titanium watch cases for the Apple Watch Ultra, news that boosted Desktop’s stock. Similarly, stories regarding the above auto manufacturers reliance on binder netting for sand casting cores and molds also brought attention to the company. The video below showcases the use of Desktop machines at BMW in one of the most substantial demonstrations of binder jetting in an industrial environment.

Fulop emphasized that Desktop Metal is fundamentally a technology company. “We’re not like some financial guys trying to do arithmetic and financial engineering. We’re trying to grow the industry and increase penetration of AM,” he explained. The company’s focus on its own innovative designs rather than OEM parts underscores its commitment to technological excellence. “Our furnaces are designed by us. Our shop system is designed by us. These are our products,” Fulop affirmed.

Stratasys’s Future

In contrast, Stratasys seems to be on the search for strategic alternatives, which may include a new merger or a sale. Because some of the major investors that opposed the merger represented the interests of Nano Dimension (Nasdaq: NNDM) and 3D Systems (NYSE: DDD), it’s possible the shareholders would urge Stratasys to reconsider a combination with the latter firm.

Otherwise, there are possible contenders for an acquisition or merger. It could come from an outside business looking to jump into AM and conquer the industry. A firm like Bosch could make a more definitive move into 3D printing, after toying in the space and using the technology internally for decades. 

An interesting possibility would be HP, who partnered with Stratasys on a desktop machine earlier in the millennium. Because some of Stratasys’s leadership hails from HP’s Israeli operations, it wouldn’t be altogether surprising. Despite the fact that Stratasys’s selective absorption fusion overlaps with HP’s multi jet fusion. This would also bring Stratasys into the metals market, part of the justification for the Desktop deal. Perhaps HP will spin off its AM division to merge with Stratasys. 

Did Stratasys Voters Screw Up?

 Fulop also pointed out that the failed merger would have been a major game-changer in the industry, one that posed a threat to competitors like 3D Systems. “They came in and threw the kitchen sink at it,” he said. Regardless, Desktop Metal’s CEO believes people will one day look back on this moment as a missed opportunity. “People are going to look back at this moment in a decade and say, ‘Did we screw this up?'”

As both Stratasys and Desktop Metal embark on separate journeys, it’s evident that the additive manufacturing industry is at a pivotal moment. The fallout from the called-off merger not only illuminates contrasting views among shareholders but also sets the stage for two separate, yet impactful, paths in the industry. While Desktop Metal remains steadfast in its ambition for growth, Stratasys is left seeking new strategic directions. This divergence is a telling chapter in the ongoing narrative of 3D printing, and as Ric Fulop confidently asserted, the industry should keep a keen eye on what’s to come.

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