Stratasys, Desktop Metal, 3D Systems, and Nano Dimension merger transaction
June began with news that plans for 3D Systems’ merger with Stratasys were now public. Since then, 3D Printing Industry has spoken with a number of people familiar with the ongoing process. With Nano Dimension and Desktop Metal drawn into this four-way M&A, the ongoing transaction is unlike anything they have seen before, according to one person I spoke with.
This article will attempt to bring you up to speed on the latest developments. However, I can’t promise that more news will not be announced before you finish reading.
A brief timeline of recent events in the 3D Systems, Stratasys, Desktop Metal, and Nano Dimension takeover battle/merger
20 June 2023 Credit Suisse’s Shannon Cross issues seven-page research bulletin on the rejection of latest 3D Systems bid for Stratasys.
27 June 2023 – 3D Systems increases offer to buy Stratasys. The new proposal entails converting each Stratasys ordinary share into $7.50 in cash and 1.3223 newly issued shares of 3D Systems common stock. This means Stratasys shareholders would own approximately 41% of the combined company and receive around $540 million in cash. Combined equity and cash value the deal at $20.72 (DDD SP $10 x 1.3223 = $13.22 + $7.50 = $20.72).
27 June 2023 – Nano Dimension increases partial tender cash offer to acquire Stratasys from $18.00 to $20.05.
28 June 2023 – Lake Street Capital Markets’ Troy Jensen publishes a five-page report entitled Merger Mania Part II – The Good, The Bad, and The Ugly.
29 June 2023 – Donerail, a 2.3% shareholder in Stratasys, publishes an open letter supporting the 3D Systems takeover of Stratasys.
30 June 2023 – Stratasys issues responses to Nano Dimension and 3D Systems, saying offers are not superior to Desktop Metal deal.
Remember here that J.P. Morgan is acting as financial advisor to Stratasys with Goldman Sachs assisting 3D Systems, equity research companies, analysts, and shareholders are not uninterested parties. With this in mind, I’ll run through the key points of each timeline event and add a short point to consider for each.
This is probably the right time to put on the kettle and prepare a cup of tea.
Credit Suisse Research Bulletin on Stratasys, Desktop Metal, and 3D Systems
In this research, it is suggested that 3D Systems could potentially increase the exchange ratio to ~1.7 and offer ~$24/share while maintaining ~51% control, an increase that previously led to a positive stock reaction. Stratasys has essentially set a floor price of $30/share for its own value when combined with Desktop Metal. In past years, 3D Systems submitted multiple bids to acquire Stratasys; however, due diligence processes failed to result in an acquisition.
A merger between Stratasys and Desktop Metal is seen as providing greater long-term opportunities, including the scaling of Desktop Metal’s technology and integration with Stratasys’ mature operations. Despite a potential short-term increase in profitability from a merger with 3D Systems through cost reductions, long-term growth is seen as limited, according to the analyst.
Credit Suisse proceeds to set out its target prices, ratings, valuation methodology, and the risks associated with those ratings. For ease of reference, the ratings and target prices and those from Lake Street Capital are presented below.
|Opening Share Price||Lake Street||Credit Suisse|
|30th June 2023||Rating||Target Price||Rating||Target Price|
|3D Systems||$ 10.36||Buy||$ 12.00||Underperform||$ 7.00|
|Desktop Metal||$ 1.81||Hold||$ 1.60||Neutral||$ 2.00|
|Stratasys||$ 18.13||Buy||$ 21.00||Outperform||$ 20.00|
3D Systems’ underperform rating and $7 target price is based on 1.3x EV/2024 sales, compared to the current 1.8x EV/2024 sales valuation.
The current valuation may consider long-term bioprinting initiatives, which are considered difficult to value due to limited financials and an unpredictable timeline. Risks to the rating, i.e. that an alternative rating may be more appropriate, include increased awareness and education of additive manufacturing, the potential for M&A, industry consolidation, alleviation of the macro environment and supply chain challenges, and success in printing organs and tissues.
Desktop Metal gets a neutral rating and the $2.00 target price is based on 2.2x EV/2024 sales compared to the current 2.1x valuation. DM could be seen as a potential takeover candidate, but first, the portfolio would need to be cleaned up due to multiple disparate assets acquired in recent years, according to the analyst.
Risks include the inability to improve the cash burn rate, deterioration in the macro environment, changes in the pace of additive manufacturing adoption, industry consolidation, and overachievement of cost-reduction targets without impairing revenue growth.
Stratasys receives an outperform rating and $20 target price, this is based on 1.5x EV/2024 sales, compared to the current 1.1x EV/2024 sales valuation. Credit Suisse says Stratasys is believed to deserve a premium due to lower customer concentration and management’s strategy that targets cross-selling and leveraging existing IP. Operationally, Stratasys is seen as the strongest additive stock to own due to demonstrated expense discipline and a clear, focused strategy.
Risks include the inability to sell new technologies into existing client accounts, integration of M&A, slower market adoption of additive, higher customer acquisition costs due to increased competition, macroeconomic headwinds, and potential disruption in sales from NNDM’s efforts to acquire Stratasys.
Why is this of interest? Shannon Cross at Credit Suisse states the merger of Stratasys and Desktop Metal provides greater long-term value and flags $30/share (the combined value of Desktop and Stratasys) as the price 3D Systems needs to beat.
3D Systems increases offer to buy Stratasys – investor call with Jeffrey Graves, President, CEO & Director
A special investor call on June 27th aimed to discuss 3D Systems’ revised proposal to acquire Stratasys.
The new proposal entails converting each Stratasys ordinary share into $7.50 in cash and 1.3223 newly issued shares of 3D Systems common stock. This means Stratasys shareholders would own approximately 41% of the combined company and receive around $540 million in cash.
As of the market close on June 26, this proposal equates to a value of around $20 per share, approximately a 33% premium to Stratasys’ closing share price on May 24, 2023. The combination is preferred due to perceived scale, synergies, and an industry-leading financial profile. This is a response to the proposed Stratasys and Desktop Metal transaction.
The combination of 3D Systems and Stratasys would create a global leader in the additive manufacturing space, around 50% larger in revenue than the proposed Stratasys and Desktop Metal combination. 3D Systems suggests that its offer is superior to the Desktop Metal combination due to its scale and financial strength. The industry is set to grow at a 21% CAGR over the next 5 to 7 years, creating an $80 billion total addressable market.
There is growth potential in the dental and regenerative medicine business despite near-term headwinds due to inflationary pressures and supply chain issues. The company also believes its work in regenerative medicine is highly innovative and can significantly enhance shareholder value. It has three opportunities in this space: human organs, human non-organ tissue, and drug development.
The combination with Stratasys would provide a comprehensive technology portfolio with minimal overlap and meaningful revenue opportunities.
They project a combined revenue of over $1 billion and $145 million in EBITDA for 2023. This, they claim, is a significant improvement over the financial profile of a Stratasys and Desktop Metal combination.
3D Systems believes that its financial profile will result in an attractive near-term outlook representing double-digit revenue growth, efficient R&D spending for sustainable innovation, and 15-plus percent EBITDA margins. They propose that their offer represents a total value of approximately $20 per Stratasys share. After including $100 million of synergies, their revised offer equates to approximately $26 per Stratasys share or an uplift of approximately 71%.
3D Systems expressed skepticism towards the Desktop Metal merger, criticizing its reliance on assumptions they view as unfounded and unreasonable. They note that Desktop Metal has a history of fueling top-line growth by overpaying for unprofitable and poorly performing assets, leading to two goodwill impairments for a combined total of $500 million.
3D Systems Corporation challenges the perceived potential of binder jet technology, as touted by Stratasys, asserting that their own laser bed fusion technology is more advanced and better for the future of mass-produced metals. During the call, they said their proposal offers a larger and more profitable company than the Desktop deal, which they believe is based on speculative financials, inferior technology, and a poor acquisition and integration track record.
In terms of potential antitrust concerns, 3D Systems highlights the limited overlap in their product portfolios and the existence of a large number of competitors in the 3D printing industry, including smaller businesses and larger companies like GE, HP, and Nikon.
3D Systems previously made a strategic decision to exit the on-demand part-making business, to avoid competing with their customers. They believe this strategy is still applicable in the potential merger with Stratasys, but they are open to revisiting decisions based on detailed analysis.
The company is willing to offer a fixed cash amount of around $540 million for shareholders, which could vary based on individual shareholder preference. There are no current plans to increase the total cash amount through leveraging if shareholders prefer cash over equity.
Jeffrey Graves, President, CEO & Director, believes the short-term and long-term value combination for their shareholders is correct, particularly considering new markets like regenerative medicine.
Graves does not see the merger with Stratasys as a means of supporting the regenerative medicine sector. Rather, he believes the combined portfolio will allow them to offer a broader range of technology to each market vertical, enhancing both their core businesses – healthcare and industrial.
The executives argue that the core business of the company, even without counting the regenerative medicine segment, promises excellent growth prospects and EBITDA performance through the combination with Stratasys. In the future, the company does not plan on divesting any core technologies; both companies’ printing technologies, materials, and software are seen as valuable assets.
While acknowledging investments in binder jetting technology by other companies, Graves is clear that he sees direct laser sintering of metal powders as a more proven and reliable technology, currently in production and meeting 80% of market applications.
Why is this of interest? 3D Systems is persistent. There’s a desire to avoid a hostile takeover. 3D Systems believes that this deal offers the best value for the additive manufacturing space, its shareholders, and Stratasys shareholders. According to one person familiar with the deal, confidence lies in the likelihood that Nano’s tender won’t materialize and the general market’s reaction to the Desktop Metal transaction, compared to a positive movement in 3D Systems’ share price post deal announcement. They suspect Stratasys has rejected their offers because it allows their leadership team to maintain control, potentially at the expense of shareholder value. There are also doubts over the $30 per share valuation suggested by Credit Suisse, and included in Stratasys’ investor presentation, indicating that it’s based on speculative revenue synergies, which are typically discredited in M&A situations, due to their uncertain nature.
According to one source 3D Systems can proceed with the transaction without raising additional cash, as verified by financial advisors. The same person confirms that many major shareholders have bought into the process, acknowledging the value in the 3D Systems transaction. The combined balance sheet, post-transaction, will, by their calculations, have around $150 million. While neither company is currently profitable, they are both playing the scale and leverage game, looking to the future.
An upcoming Desktop Metal shareholder vote is seen as a major juncture. This vote will indicate whether Stratasys shareholders approve of the management’s decisions and will play a crucial role in determining the future of the merger, acting in no small way as a referendum on the deal. An updated SEC filing is expected in the coming weeks, this will provide the date.
Merger Mania Part II – The Good, The Bad, and The Ugly
More institutional investor research now, this time from Troy Jensen at Lake Street Capital Markets.
The divertingly titled report kicks off with a brief breakdown of the latest proposal from Nano Dimension and 3D Systems. 3D Systems has increased their offer for Stratasys, now offering shareholders 41% of the combined company (up from 40%) which equates to about $20.76 per share. Nano has increased their offer price to $20.05 per share, believed to be their highest affordable price given their need to maintain cash reserves for their unprofitable operations.
Nano Dimension’s first public tender offering for Stratasys failed, with only an estimated 8% of shareholders accepting their offer of $18 per share. The analyst suggests that if scalability is required for healthy profitability, a merger between 3D Systems and Stratasys may make more sense.
Lake Street then proceeds to assess each business combination. Let’s start with 3D Systems and Stratasys: “The Good.”
3D Systems might still enhance the offer with more shares or cash, but they’re restricted to using too many shares as they can’t offer more than 49.9% of the combined company. They’re also wary of overextending their balance sheet. The proposal is favorable if you believe the additive manufacturing industry needs scalability. In that case, a combination of 3D Systems and Stratasys seems the most sensible.
Concerns were initially raised about product overlap between 3D Systems and Stratasys, especially in markets where both were active. However, after discussions with the company, it seems the revenue overlap is significantly different due to their distinct focuses in different technologies.
Overlapping investments in research and development, sales and marketing, and supply chain efficiencies are identified as primary drivers of cost synergies in the combined company. Despite the favorable aspects of a merger with 3D Systems, Stratasys seems determined to remain an independent company and is likely to reject the DDD offer, choosing to continue with their planned merger with Desktop Metal.
Lake Street call the next combination, Desktop Metal and Stratasys, The Bad noting both Desktop Metal and Stratasys confirmed their guidance despite potential sales disruption due to merger announcements, which could affect Q2/Q3 demand and cause Desktop Metal to struggle to meet their guidance. Stratasys would be absorbing an unprofitable business, Desktop Metal, that has consistently missed its financial forecasts. There is skepticism around the growth forecast incorporated into their 2024-26 revenue and profitability guidance.
The analyst points out potential issues like product overlap, channel conflicts, and business segments that Stratasys has not shown interest in, along with risks of integration and product rationalization.
The combined company of Stratasys and Desktop Metal claims to generate $50 million in annual sales synergies. However, there is doubt about this due to significant technology overlap and the possibility of product line rationalization. The claim that 100% of parts made on Desktop Metal machines are end-use parts is challenged as unrealistic.
Lake Street said, the merger is perceived as a desperate move by Stratasys to raise their combined market cap beyond Nano Dimension’s buying power, rather than a strategic move. Stratasys may have been interested in Desktop Metal’s metal products due to their lack of exposure to metal, but they didn’t seem to want the EnvisionTEC product lines, which they had several opportunities to buy before. The proposed merger dilutes the profitable growth story of Stratasys with the unprofitable business of Desktop Metal.
The merger is an all-stock transaction, valuing Desktop Metal at $1.8 billion. DM shareholders will receive 0.123 shares of SSYS stock, which represents $1.83 per share. Stratasys shareholders will own approximately 59% of the combined company, with DM shareholders owning the remaining 41%.
The transaction is expected to be completed in Q4 2023 with Yoav Zeif leading as CEO and Ric Fulop as Chairman of the board.
The final piece of analysis from Lake Street is “The Ugly” – Nano Dimension and Stratasys
Nano Dimension has been persistently trying to acquire all or a majority of Stratasys for several months, with Stratasys consistently rejecting these offers due to valuation and legal concerns; the highest bid from Nano has been an all-cash offer of $20.05 per share.
Nano attempted to bypass the Stratasys board by directly offering Stratasys shareholders $18 per share through a public tender offer, but this was unsuccessful with only 8% of shares tendered. Nano owns nearly 15% of Stratasys shares and needs more than 50% for controlling interest. The company increased its public tender offer to $20.05 per share and reduced the sought shares from 38.8%-40.8% to 31.9%-36.9%.
The analyst suggests that Nano will need to reach the midpoint to acquire a majority position if only 31.9% of shares tender. The success of Nano’s acquisition attempt is believed to be dependent on upcoming Israeli court decisions regarding the legality of Stratasys’ poison pill and a recent Nano shareholder vote to remove several board and management team members.
If Nano loses either court case, the analyst predicts an end to their attempt to acquire Stratasys, but if they win both cases, the next key date is July 26th, when the $20.05 public tender offer expires.
The analyst urges Nano to realize that institutional investors do not support their attempt to acquire Stratasys, with past attempts seen as not serious due to the large spread between the offered and trading price of Stratasys’ stock.
A merger between Stratasys and Nano is not expected to yield the same scale efficiencies as potential mergers with Desktop Metal or 3D Systems would, and it may also lead to a complicated situation if Nano were to own slightly more than 50% of Stratasys’ stock, which would result in the remaining shares being extremely illiquid and unattractive to other institutional investors.
Donerail, a 2.3% shareholder in Stratasys, publishes an open letter supporting the 3D Systems takeover of Stratasys
According to an open letter published by The Donerail Group LP, they are, a major shareholder of Stratasys, who own approximately 2.3% of the company’s outstanding shares. Donerail is based in Los Angles and led by William Z. Wyatt, Managing Partner.
The letter states that despite attempts by Donerail to meet privately with the Stratasys Board of Directors to discuss strategic initiatives, their requests have been consistently ignored.
Donerail expresses concerns over the company’s governance and strategic direction, heightened by recent meetings and details from regulatory filings. The Donerail letter criticizes the Board for neglecting fiduciary duties by refusing to engage with potential buyers interested in acquiring the company in the past two years.
They write that since January 2021, Stratasys has received at least 12 unsolicited acquisition proposals from three different potential buyers, as disclosed in a June 20th regulatory filing.
Most of these offers were rejected by Stratasys without engagement, which Donerail argues has been costly for the shareholders. The Board did engage with one offer – from Desktop Metal Incorporated in March 2023, which instead of a sale resulted in a risky merger, not well received by the investment community.
The letter states that Stratasys’ stock price dropped 10% following the merger news, and analysts criticized the move due to the absorption of an unprofitable business. In a meeting on June 21st, Stratasys’ CEO, Dr. Yoav Zeif, confirmed that the Board is now “working for shareholders” and committed to doing the “right thing” for shareholders, despite the company’s history of rejecting attractive acquisition bids.
The offer from 3D Systems is seen by Donerail as particularly promising and warrants immediate engagement due to its increased proposal offering a combination with a strategic party in a cash and stock deal valuing Stratasys at a 27% premium to Monday 26th June’s closing trading price.
Donerail praises the Board for their commitment to reviewing the revised merger proposal from 3D Systems and urges a quick review before engaging directly with 3D Systems to optimize the offer for Stratasys shareholders.
The Board’s previous inclusion of language in the Desktop Metal merger agreement, allowing them to engage with an unsolicited suitor if the proposal is “reasonably likely to lead to” a superior offer, is considered by Donerail to be a wise move in the current situation. Donerail encourages the Board to act in their capacity as fiduciaries to negotiate and announce a transaction in response to 3D Systems’ renewed proposal.
The letter continues to urge the Board to follow its commitment to “work for shareholders” and abandon the Desktop Metal deal in favor of a more attractive deal. After two years of rejecting willing suitors, the Board is implored to be mindful of its fiduciary obligations to shareholders and not to have an inflated view of an execution story full of challenges.
Donerail hopes that no further action beyond this letter will be necessary and expects the Board to be properly advised on how to proceed. Donerail is ready and open for communication at any time with the Board, management team, or any shareholder.
Why is this of interest? According to a person familiar with the parties involved, Donerail was invited to meet with Goldman Sachs, the 3D Systems advisor. This meeting request is considered unusual, as it happens only once a year or two. According to the source, this signifies an interest in stirring things up. Donerail, a self-described “value-oriented, activist” investor, had previously taken a position in Turtle Beach, a gaming accessory manufacturer.
Wait, there’s more…
Stratasys has responded to the revised offers from Nano Dimension and 3D Systems and appears to be going ahead with the Desktop Metal deal. Stratasys writes, “[3D Systems offer is] an approximate 3% increase in total value, adding 1% to the total ownership for Stratasys shareholders, is opportunistic, continues to materially undervalue Stratasys, does not constitute a “Superior Proposal” and does not provide a basis upon which to enter into discussions with 3D Systems, pursuant to the terms of the merger agreement with Desktop Metal, Inc.”
This fast rejection prompted 3D Systems CEO and President Dr. Jeffrey Graves to say, “The Stratasys Board has made the perplexing decision to not engage with us to reach a mutually agreed upon, friendly transaction that we believe would unlock value for all shareholders. Frankly, we are surprised that in their quick rejection, Stratasys’ Board did not acknowledge or refute the merits of our proposed transaction, or respond to the market’s concerns about the value destruction of the Desktop Metal merger.”
Graves continues, “We are hearing from a spectrum of Stratasys shareholders that they understand and believe that a combination between 3D Systems and Stratasys offers an unparalleled option for certainty, scale and long-term growth. This feedback from Stratasys’ own shareholders only strengthens our conviction that this is the right deal at the right time. It is concerning that, as public company directors, the Stratasys Board is ignoring these signals from its investors. It is difficult to understand their rationale, which we think raises questions as to whether they have entrenched themselves in a position that demonstrates an absence of focus on maximizing shareholder value.”
With the volume of information, already published, it’s quite possible to lose track of who said what and when. Here are a couple of recent exchanges that might be of interest
Proclamations around the transaction are pitching a kind of metal 3D printing shoot-out with Binder Jet set against DMLS. Now given the parties involved, it may be appropriate to take these statements with a grain of salt.
Compare the statement of 3D Systems to this one from Credit Suisse, “3D Systems does have a metal portfolio, though the systems are more ideal for low volume high-cost applications and the technology is more mature (e.g., DMLS systems used to print rocket parts).”
The 3D Systems side, “We do not think we are alone in believing that our metals technology is better and more advanced. On the next slide, you can see that our technology, laser bed fusion generated 84% of all metals hardware revenue in the industry last year. To put this in perspective, that is 21x greater market share than binder jetting, a technology that, again, is nearly 3 decades old.”
“The problem is that the future is already 28 years old, we believe shareholders should be clear that a significant piece of the binder jet technology touted by Stratasys’ management was acquired by Desktop Metal when they bought ExOne in 2021. In our view, ExOne is a business the industry and the market know very well and is yet to prove viable for mass production or to generate any profit. Its performance prior to the acquisition by Desktop Metal does not point to the growth potential that Stratasys management is claiming,” said the 3D Systems CEO.
Dental 3D printing is another arena where the statements are mounting up. Here’s Credit Suisse, “The base case assumptions [supporting the Desktop and Stratasys deal] are largely driven by the scaling of DM’s metal binder jet technology and restorative dental business.”
Over to 3D Systems, “We believe that we have, by far, the most successful dental business in the 3D printing universe. The near-term headwind on our results is principally a result of recent inflationary pressures on consumers and inventory buildup related to supply chain in our orthodontics business. Excluding our dental business, revenue grew 12% year-over-year in Q1 on a constant currency basis, with 9% growth in our industrial business, and 22% growth in our healthcare business, excluding dental.”
So, yes, notwithstanding current pressure on consumer spending 3D Systems dental business is prospering, A fact that will not have gone unnoticed by competitors who may also seek a share of the nearly $40 billion global dental market.
Where next? It would seem things are not ramping down; indeed, they may be just getting started.
Even more? What do analysts think of the 3D Systems, Stratasys and Desktop Metal deal?
What does the future of 3D printing for the next ten years hold?
What engineering challenges will need to be tackled in the additive manufacturing sector in the coming decade?
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Featured image shows 3D Systems Healthcare Technology Center. Photo by Michael Petch.