3D Systems’ latest proposal to acquire Stratasys has been rejected. A revised proposal was delivered to Stratasys that valued the company at $27 per share, according to 3D Systems.
Under the proposal, received by Stratasys on September 6th, Stratasys shareholders would receive $7.00 in cash and 46% ownership of the merged company, a 1.6387 exchange ratio.
Stratasys and 3D Systems met on August 22nd, and the offer has been developed to address the feedback raised during that in-person meeting. However, the current share price of 3D Systems has become a stumbling block for the deal with 3D Systems stating, “Stratasys has responded to this proposal by acknowledging that its diligence has confirmed material cost synergies arising from a combination that would translate into hundreds of millions of dollars of shareholder value, but concluded that the current spot price of 3D Systems shares renders the proposal inadequate.”
Stratasys issued a formal rejection of the revised proposal on September 12th. Stratasys disputed the valuation 3D Systems placed on the deal, claiming the proposal represents the lower figure of $15.26 per Stratasys.
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Expectation of a friendly takeover fades
Initial hopes that merger discussions between Stratasys and 3D Systems would be conducted “privately and constructively” appear to be fading, with both CEOs now issuing more strongly-worded statements.
3D Systems CEO Dr. Jeffrey Graves has accused the Stratasys board of “fiddling away shareholder value” and trying to “run out the clock” on the merger discussions. The next key date on that clock is the Stratasys Extraordinary General Meeting of Shareholders scheduled for Thursday, September 28, 2023.
In response, Stratasys has issued a statement outlining its concerns regarding the deal, including an appraisal that the synergy between the companies is lower than 3D Systems forecasts, a lengthy timeline of up to 18 months to close a deal may be needed, and has “serious concerns” about the 3D Systems’ management team.
Furthermore, Stratasys includes an assessment of the impact news of Align Technology’s acquisition of Cubicure. Stratasys says revenue from Align Technology “represents 23% of 3D Systems revenues,” and they “believe Align is likely to transition to multiple-source printing technology over time.”
A statement issued by 3D Systems previously said that Cubicure’s R&D efforts “have had no impact” on the company’s operations. Emory Wright, Align Technology executive vice president of Global Operations stated, “3D Systems continues to be a critical partner for Align,” adding that “We have worked with them over the past 25 years to transform a prototyping technology to a mass production system.” Wright added, “We will continue to work with them to further advance our indirect printing of aligners into the future.”
The full statement from 3D Systems CEO issued on September 11th 2023
President and CEO Dr. Jeffrey Graves stated, “We listened to shareholder feedback and made a strong effort to reach a friendly transaction but it seems there is no price that would satisfy the Stratasys Board. Shareholders of Stratasys have seen their board turn down offer after offer, watching only the consistent destruction of value in the meantime. The latest game appears to be an attempt to ‘run out the clock’ on supposed discussions with us, while always moving ahead with the massively value-destructive merger with Desktop Metal. We are confident that shareholders will support our combination and send an unequivocal message to the Stratasys board that they can no longer protect themselves while fiddling away shareholder value.” The full terms of 3D Systems’ revised proposal to Stratasys were included in a merger agreement, together with a full set of disclosure schedules, delivered to Stratasys on September 6, 2023, that built upon the terms of the binding merger agreement submitted on July 13, 2023 and filed publicly with the SEC. Updates to the July 13 offer are:
Superior Consideration: In response to Stratasys’ request for a consideration mix consisting of less cash and a higher percentage of stock, in large part in order to permit Stratasys shareholders to participate in more of the upside of the agreed-upon synergies, 3D Systems proposes that Stratasys shareholders receive, for each of their shares, $7.00 in cash and 46% ownership (an exchange ratio of 1.6387 based on the last share count disclosure) of the combined company as compared to 44% in 3D Systems’ July 13 offer.
Certainty of Closing: The revised offer includes a reverse termination fee of $50 million payable to Stratasys in the event the merger does not receive required antitrust clearances, demonstrating 3D Systems’ confidence in obtaining all such clearances.
Retention of Key Talent: 3D Systems recognizes the critical role that management, employees and other key contributors of both Stratasys and 3D Systems will play in driving value creation at the combined company and proposes to create a $10 million retention program, to be allocated among employees of each company on an inverse basis to the projected pro forma ownership by their respective shareholders.
Management: 3D Systems responded affirmatively to Stratasys’ request for a key leadership role for Stratasys’ current Chief Executive Officer with the combined company to help ensure a smooth integration of the two companies that will maximize short- and long-term value creation for shareholders.
All other terms outlined in 3D Systems’ revised proposal remain substantially the same as those included in the July 13 signed merger agreement. This includes the commitment by 3D Systems to pay the $32.5 million termination fee owed by Stratasys to Desktop Metal upon Stratasys’ exit from its existing merger agreement with Desktop Metal and entrance into this new merger agreement with 3D Systems.
The Company reiterates its view of the key benefits of its proposed transaction with Stratasys:
Scale Drives Leadership: Delivers immediate scale for leadership in the rapidly growing and fragmented additive manufacturing industry. This includes 3D Systems’ strong, ongoing 25-year partnership with Align Technology, publicly reaffirmed on September 7, 2023, where the Company provides hardware, materials, processing, and services for Align in connection with its highly efficient indirect production of aligners. Align operates hundreds of 3D Systems’ printers producing over one million parts daily and continues to rely on 3D Systems to support its operations.
Complementary Technology Portfolio: Combination of proven technologies with limited overlap, creating a combined portfolio better positioned to service nearly every vertical in the 3D printing market today.
Significant Cost Synergies: Highly certain value creation potential through realization of at least $110 million in cost synergies across SG&A savings, R&D integration and COGS optimization, in addition to significant revenue opportunities not currently included in 3D Systems’ pro forma valuation analysis.
Industry Leading Financial Profile: Estimated LTM combined revenue of $1.2 billion and ~12% EBITDA margin, and no debt or equity financing contemplated.
Meaningful Growth Opportunities from Regenerative Medicine: Unmatched bioprinting leadership potential, with a clear road map for human applications, including human trials for 3D printed lungs anticipated by 2026.
Dr. Graves continued, “This proposal demonstrates our continued, unwavering belief that a combination of 3D Systems and Stratasys brings unique value. It creates unparalleled scale, significant cost synergies to enhance financial performance and supports long-term growth investments, and a comprehensive technology portfolio to support customers as they increasingly adopt 3D printing in their production environments. We believe that a combination of our two companies is clearly superior to any other potential combination in our industry, and that the vast majority of shareholders in both companies share our view. We will continue to evaluate our options in completing this important transaction to transform the additive manufacturing industry.”
Stratasys Statement issued September 12th, 2023
“3D Systems’ most recent proposal, received on September 6, 2023, to acquire Stratasys for $7.00 in cash and 1.6387 newly issued shares of 3D Systems common stock per ordinary share of Stratasys significantly undervalues Stratasys. The proposal by 3D Systems comprises consideration with a nominal value of $15.26 per Stratasys ordinary share as of September 11, 2023, representing a premium of only 15% to the closing stock price of Stratasys ordinary shares as of such date and a premium of only 3% to the unaffected closing stock price of Stratasys ordinary shares as of May 24, 2023. In fact, the consideration for Stratasys ordinary shares implied by 3D Systems’ most recent proposal is 35% lower than the value implied by 3D Systems’ July 13, 2023 proposal to acquire Stratasys for $7.50 in cash and 1.5444 newly issued shares of 3D Systems common stock per ordinary share of Stratasys (a nominal value at that time of $23.64 per Stratasys ordinary share).
In addition, the most recent proposal by 3D Systems carries several significant risks. In conducting mutual due diligence, Stratasys uncovered a significant number of material issues with respect to a proposed transaction with 3D Systems, including:
Serious concerns about 3D Systems’ short- to medium-term growth prospects:
3D Systems reported Q2 results on August 9, 2023, missing its own guidance as well as street expectations, and significantly guiding down 2023 fiscal estimates. 3D Systems is now expecting revenue to decline one percent at mid-point guidance over 2022, versus four percent revenue growth mid-point guidance, prior to Q2 earnings.
Revenue from Align Technology, Inc. (“Align”), which represents 23% of 3D Systems revenues, will be expected to create severe growth challenges for 3D Systems. We believe Align is likely to transition to multiple-source printing technology over time. We had previously raised concerns that Align was likely to migrate away from 3D Systems’ stereolithography technology towards DLP technology for both indirect and direct printing of appliances and other source suppliers. Align’s recently announced acquisition of Cubicure GmbH, with its strength in direct 3D printing of appliances, reaffirmed our concerns. At this stage, it is highly uncertain at what market share and margins 3D Systems’ business can operate in the future as Align ramps up its own solutions and additional alternatives continue to grow. The impact could be highly material and calls into question whether the market currently reflects the true intrinsic value of 3D Systems’ business.
Structural challenges to a path to attractive profitability:
3D Systems’ portfolio already operates at gross margins that are significantly below the gross margins of Stratasys: 3D Systems is at 39%, while Stratasys is at 49%. Consensus 2023 estimates for 3D Systems’ EBITDA remain negative. If 3D Systems’ dental business declines due to Align shifting its sourcing, 3D Systems’ profitability could fall even further and weigh down the margins of a combined company. We believe that this would make it extremely difficult to achieve attractive long-term operating margins for a combined company.
Net synergy potential is materially lower than what 3D Systems is broadcasting:
3D Systems was unable to furnish any credible support backing its claim of cost synergies of more than $110 million. Based on independent analysis performed by a leading consulting firm, we estimate annual cost synergies to be $74 to $88 million associated with the merger.
In addition to this gap in realizable cost synergies, based on detailed work performed by Stratasys management and independent advisors, there will be approximately $50 million of annual negative revenue synergies. Even 3D Systems has acknowledged that this portion of the business would be lost as a result of a potential transaction.
Significant regulatory consummation risks and extended timeline to closing of 9 to 18 months:
Based on detailed joint analysis by Stratasys and 3D Systems, a combination of the two companies would likely require a lengthy and extensive regulatory review process, an extended duration to closing and significant costs to obtain the required regulatory approvals.
This extended timeline to closing creates significant risks of employee attrition. Additionally, despite our repeated requests, 3D Systems has not provided any operational or integration plan, preventing us from assessing which of Stratasys’ employees would be critical for a combined company to execute on its business plan.
Serious concerns regarding the ability of 3D Systems’ management team to run a combined company:
3D Systems’ management team has repeatedly missed its own cost reduction targets, adding to our concerns regarding its ability to achieve its target cost synergies.
Stratasys’ management team, in contrast, has delivered superior performance:
From 2021 to 2023, based on mid-point guidance of each company, 3D Systems’ revenue declined by one percent, adjusting for divestitures, while Stratasys’ revenue grew by six percent, adjusting for divestitures.
3D Systems’ business operates at a 39% gross margin, significantly below a 49% gross margin for Stratasys. Given its short- to mid-term growth challenges, a decline in 3D Systems’ business may widen the gap.
Based on street consensus estimates, 3D Systems is expected to generate operating loss of $41 million, while Stratasys is expected to generate operating profit of $19 million in 2023.
Of the last 12 quarters, 3D Systems missed street estimates for either or both of earnings and revenues for 7 quarters, while Stratasys management has met or surpassed such estimates for EVERY quarter.
Therefore, the Stratasys Board, after careful review and consultation with its outside financial and legal advisors, has determined that 3D Systems’ most recent revised proposal does not constitute a “Superior Proposal,” as defined in Stratasys’ merger agreement with Desktop Metal. Accordingly, Stratasys has terminated discussions with 3D Systems.
In response to 3D Systems’ press release dated September 11, 2023, we would like to clarify the following:
Our request for more stock and less cash: This request was driven by our concerns that a combined company would be operating with significantly less cash, potentially leading to an inability to continue to invest in the business or to further dilution from a need to raise significant cash amounts, especially given that the timeline to closing would be expected to run as long as 9 to 18 months, which would deplete additional cash from 3D Systems’ own balance sheet.
Management of the combined company: We were very clear with 3D Systems that we were NOT concerned about the proposed composition of a new board despite Stratasys shareholders’ large ownership; however, we insisted upon having an appropriate management structure to ensure that the benefits of the combination would be achieved, including realization of the synergies, and that key employees would be retained during an extensive regulatory review process.
As announced on May 25, 2023, Stratasys entered into a merger agreement with Desktop Metal (the “Desktop Metal Merger Agreement”), pursuant to which Desktop Metal agreed to combine with Stratasys in an all-stock transaction. The Stratasys Board reaffirms its unanimous approval, recommendation and declaration of advisability of the transaction with Desktop Metal.”
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Featured image shows 3D Systems Healthcare Technology Center. Photo by Michael Petch.