In this cross-post from his own 3D printing blog VoxelFab, 3D printing Consultant Joris Peels discusses the potential motivations, risks, and rewards behind the acquisition of media darling Makerbot by industry leader Stratasys. Included is some good summary about the recent history and developments of 3D Systems and Stratasys, as well as some good analysis. A great long-read filled with amusing metaphors and analogies and, more importantly, great insight. Follow Joris on Twitter here.
There is a Dutch expression, “to buy a cat in the bag.” This means to buy something that ends up being not what you thought it was or hoped it would be. The expression comes from a much less PETA and Internet influenced age, when the crafty Dutch used to make coats from cats. In order to obtain a good coat, the cat would have to have a single well-defined fur color, such as black, and not be a type of multi-colored tabby cat, for example. If someone had cheated a furrier by selling him a cat of the wrong color, sight unseen, the furrier had “bought a cat in the bag.” The furrier would, in the future, be wise to look into the bag holding his dead cat before purchasing. Buyer beware. But, what if the furrier didn’t want to peek into the bag? What if it was enough for him or her to be seen buying it and marching triumphantly across the local market, proudly carrying his bag? What if he hoped it would be a black cat, but any cat would do, as long as he was seen on this day? What if he just wanted to be seen marching triumphantly, much like that rival furrier who had continually kept the towns’ tongues wagging with his frequent and bold cat purchases? What if this would serve an ancillary business goal in the short term and, perhaps, work well for him in the long run? What if, sometimes, any dead cat will do, as long as it is large enough? In other words, sometimes it may be OK to spend $403,000,000 on something that may not be worth i,t as long as it is seen as a good move.
In short, I think that this is a nice parable for the Makerbot acquisition by Stratasys for $403m. I’m going to try and outline here why I think that, as a company, an sich, I don’t think the deal makes much sense. But, in Stratasys’ current position, this will be a good purchase for them.
Stratasys’ current stock is up 79% for the year and 222% for 3 years and 926% for ten years and the company has a market cap of $3.3 billion. 3D Systems has a market cap of $4.3 billion is up 134% for the year, 917% for three years and 2333% for ten years. 3 year average revenue growth at Stratasys was 29%, whereas it was 43% at 3D Systems. Net income at Stratasys last year was 8m on revenues of 255m, while it was 39m at 3D Systems on revenues of 354m. Price to book at Stratasys is 2.1 while 3D Systems has a ratio of 8.1. Cash flow from operations may explain the disparity, in 2012 this was $1m at Stratasys (albeit, in a merger year), while it was $53m at 3D Systems. So, when seen over a few years, both stocks have done very well, but clearly 3D Systems is much more of a stock market darling and seems to have the revenue growth to match. One proviso though: 3D Systems has the 22nd highest short interest versus free float percentage on the NYSE at 32% in April. Currently the number is 28%, while Stratasys has a much lower 10% figure. This is an indication that rather a lot of bets are being placed that 3D Systems’ stock is overvalued. So, Goldilocks may find herself in a house filled with bears, while Rapunzel looks on forlorn and ignored.
There are only four publicly traded 3D printing stocks (Autodesk and GE’s attempts to be considered notwithstanding). ExOne is a new and relatively small company, Arcam is traded in Sweden, and then we have the two big boys Stratasys and 3D. They are the natural magnets for investors responding to the media hype in 3D printing. These two companies have been competing with each other to be the 3D printing leader for nearly two decades now. There is one China shop and two bulls sizing each other up with bright eyes, neither stock or company can not be seen in isolation. Even though they have very different technologies and used to be in different markets, the flights that both of their shares have taken since 2008 has changed both firms and made them much more of an Airbus/Boeing duo, eagle-eyed towards one another’s movements.
Stratasys was conservative, astute, and careful and worked on its own FDM technology. Nestled on the plains, Stratasys was the company whose employees were most likely to go bowhunting, lets say. A flirtation with HP brought much excitement and, later on, the company acquired the relatively small Solidscape to be able to work in lost wax casting. Its major move these past years has been to merge with Objet. This company’s polyjet technology is much smoother and more detailed than FDM, while generally being less robust and dimensionally accurate. The combination of the two firms means they can sell machines that work in industrial environments with tough FDM parts, as well as create highly-detailed dental, in-office, display models and other parts with Objet. Furthermore, Objet has made major strides forward in multi-material technology, letting you print different densities on one part. Objet parts have also gotten a lot stronger and may, in the future, use a process that could be adopted for full-color 3D printing. The combination was ideal and the different groups in the company seem to get along just fine, despite there having been much acrimony, at one point, between them over the dissolution of a previous partnership. It seems that the specter of 3D Systems’ advance could make friends of the unlikeliest of candidates.
The Objet merger also brought troubles. There was a class action suit in the states that was settled. More problematic is an Israeli commercial misconduct suit filed against current Stratasys and ex-Objet executives and key investors, according to Seeking Alpha. The plaintiffs include Stratasys’ current CEO and the Chairman of the Executive Committee. The lawsuit is being brought by the founders of Objet. Regardless of the merits of the suit, this could, perhaps, be a cloud that hangs over the firm.
Another issue was the fact that Stratasys had no exposure to the consumer 3D printing market and that 90% of all the media hype and attention was directed at consumer 3D printing. Analysts that have quizzed me on the 3D printing market have almost always approached it from the consumer space, and opportunities in that space, and are often unaware that many more opportunities exist in medical, metals, dental etc. Apart from its $7,000 Mojo, Stratasys had not entered into this market at all and made no investments in consumer-facing services or companies. This was a major reason why Stratasys was seen as a lot less interesting and sexy stock than 3D Systems was. Because, far away from the cold winters of Minnesota, in Rock Hill a very different firm was making major inroads into the space and keeping the media spotlight, as well as investor interest, pointed at it at all times.
3D Systems has always been more aggressive than Stratasys. It was the pioneer, was listed first, and had grown well. Only a few years ago, the firm was sitting on a pile of cash, but had a problem: it had no future. Or so many of us thought. Its Stereolithography technology was seen by many as being at the end of its life. With tedious and time-consuming manual finishing required on each part, production costs would be higher than other technologies that could perform partially mechanized post-processing, such as Stratasys’ support removal stations. Smoothness and detail are excellent with SLA, but UV degradation yellows parts and causes them to become brittle. Part strength and heat deflection temperatures were also lower than with other 3D-printed parts. Meanwhile, its SLS technology provided for less attractive and less well-defined parts than the competing SLS technology of EOS. It was felt that 3D Systems would not do well in a world dominated by end use and production parts and would be consigned to making molds, its life on a tether. And that tether was EOS’ unwillingness to enter the US market. So what did 3D Systems do? It spectacularly bought itself a future. It bought the two largest 3D scanning companies, lots of service bureaus, a prosthetics startup, a design firm, a UAV manufacturer, a materials manufacturer, and the list goes on an on. It bought consumer-facing 3D printing companies and launched a consumer 3D printer.
Only a few years ago both Stratasys and 3D Systems were captives of their own patents, developing their own technologies for their own niches and applications. Stratasys was still walking along this path, while 3D Systems became active in every single application and vertical that 3D printing had. They seemed to want to own the entire space and provide for every conceivable 3D printing requirement and solution, from 3D authoring software to consumer machines and from tools to industrial machines. It will take time to ascertain if the one stop shop approach will work and if 3D can integrate and develop synergies from its disparate business units and acquisitions. But, damn this was a company on the move.
It was the specter of this, the cookie monster munching away at every morsel on the table in the industry, that prompted Stratasys into action. The Objet merger was spectacular, but, still, Stratasys didn’t have any consumer 3D printing exposure. It has over 500 patents and a clear lead in the technology, but over 100 FDM-based startups and printers were emerging and someone somewhere had read the Innovator’s Dilemma. How to recapture initiative, show boldness and get this exposure? Buy, Makerbot of course. In one fell swoop, Stratasys would become the leader in the consumer 3D printing space. And, best of all, it could buy it for stock, which it had, and didn’t have to spend cash, which it was low on. Indeed, the company had negative free cash flow in 2012 ($-14m) and a net income of $8m. So there may have been cash to invest in developing and acquiring a startup in the consumer space, but it would not have been a gigantic amount especially since Makerbot had gotten $10m at one point. Another, very different 3D printing company, Shapeways, has received over $47m in venture funding so far. So, even though Stratasys was one of the leaders in the space and had, at one point, been sitting on a cash pile, it risked having smaller 3D printing startups get funded $30m or more by VC’s and actually run the risk of these startups being able to outspend them in the desktop space. I believe that the main reason for a weary Stratasys to buy Makerbot now was to, on the one hand, attract investors and, on the other hand, make sure that Makerbot was not able to attract significant amounts of new funding. This may have meant that Stratasys would not have, at one point, successfully been able to compete and enter into the desktop space. A possible IPO by Makerbot would have also meant a well capitalized future challenger for Stratasys. It was probably unable and unwilling to spend the money to do this now, but, in an all-stock transaction with a lower than average multiple and valuation, why not?
Sometimes any dead cat will do, as long as it’s large enough and cheap enough. Because, other than an all-stock transaction that would make major waves, Stratasys’ options for getting exposure to the consumer 3D printing space were limited. What else could it have done? Spend $10m trying to outmarket Makerbot and woo a maker audience wary of large companies and with an ingrown love for startups? They would have always been at a disadvantage and people would have been inclined to support one of those 100+ FDM startups. It could risk having invented a technology decades ago, watch others commercialize it for the desktop, without making a cent on it. Makerbot, as an asset, was not the thing they were buying here; it was momentum for the Stratasys share price and a hedge against not ever being able to compete on the desktop.
Apart from Thingiverse – which is a wonderful asset that could be a winner-takes-all file sharing solution for 3D printing, if well-managed – Makerbot’s value lies in its perceived lead in the desktop space. It has been excellent at driving marketing to itself and becoming the number 1 brand on the desktop. But, Makerbot’s machines have suffered from reliability and uptime issues from the start. The Makerbot brand and community suffered a major hit when they abruptly switched from touting their open source open hardware approach to, effectively, becoming a closed source company. The major reason for its growth has been the love and praise it has gotten from makers, open hardware people, and the community at large. They seemed more idealistic than others and were rewarded for that. This proved to be an illusion. With regards to their machines, Makerbot has not been able to take its money, and its higher numbers of staff and head start, and translate this into better machines. There are much smaller companies with far less money that have been able to make cheaper, more reliable 3D printers than Makerbot has.
For a comparison of some desktop 3D printers, look at the chart I made below. In terms of build volume, the Makerbot is significantly surpassed, while it is comparatively more expensive and delivers less, compared to many printers. Pay special attention to the build volume in liters that actually lets you compare the volume easily. The machine cost per liter of build volume is a kind of weird metric I came up with to check the price efficiency of these selected 3D printers. The units shown are all technologically interesting and, amongst them, are also the largest in unit sales. This, for many, has been a closely guarded secret but I’m sure a few of them are close to harakiri today for not disclosing their numbers. Also, pay attention to the funding numbers; these were quite high for some systems, but others are self-funded. Many have made printers that exceed the capabilities of the Makerbots.
|Build Dimensions mm||Build Volume liters||Minimum Layer Thickness mm||Cost||Assembled?||Unit sales||Crowdfunded?||Interesting||Machine cost per L of build volume|
|German RepRap PRotos X400 CE||400 x 400 x 350||56||0.1||$4,442.00||Yes||NA||No||Largest build volume, CE certification||$79.32|
|German RepRap PRotos X400||400 x 400 x 350||56||0.1||$2,408.00||No||NA||No||Largest build volume||$43.00|
|SeeMeCNC RostockMaxDelta||279 x 374||22.9||0.09||$999.00||No||300||$77,659.00||Delta printer, cylindrical||$43.62|
|Leapfrog Creatr||250 x 270 x 300||20.3||0.15||$1,613.00||Yes||1000||No||Large build volume||$79.46|
|Aleph Objects Lulzbot TK-O||300 x 300 x 225||20.3||0.45||NA||Yes||NA||No||Dual extruder||NA|
|3D Systems Cube X||275 x 265 x 240||17.5||0.1||$2,615.00||Yes||NA||No||Up to 3 extruders ($4000), cartridges||$149.43|
|RobotFactory||245 x 245 x 245||14.7||0.1||$3,918.00||Yes||NA||No||Build platform speed 5.000 mm/min||$266.53|
|Robo3D||254 x 254 x 203||13||0.1||$520.00||Yes||1050||$649,663.00||Plastic housing||$40.00|
|FelixPrinters Felix 2.0||255 x 205 x 235||12.3||0.2||$1,828.00||Yes||NA||No||High rigidity & quiet||$148.62|
|Fabbster||225 x 225 x 210||10.6||0.044||$1,797.00||No||600||No||Sticks, high speed||$169.53|
|FelixPrinters Felix 1.5||235 x 205 x 200||9.6||0.2||$1,160.00||No||500||No||Aluminum frame||$120.83|
|Ultimaker||210 x 210 x 205||9||0.05||$2,200.00||Yes||NA||No||Open source, thin layers||$244.44|
|Solidoodle 3rd Generation||203 x 203 x 203||8.5||0.1||$799.00||Yes||NA||No||Sold over 1000 of 2nd Generation.||$94.00|
|Hyrel3D||200 x 200 x 200||8||0.025||$1,645.00||Yes||NA||$152,942.00||Closed loop & support material||$205.63|
|Deezermaker Bukobot 8||200 x 200 x 200||8||0.1||$2,020.00||Yes||NA||See Bukobot||Aluminum frame||$252.50|
|Eventorbot||203 x 254 x 152||7.8||0.1||$500.00||No||NA||$137,508.00||Open source & Attractive||$64.10|
|CB Printer||200 x 200 x 180||7.2||0.1||$2,265.00||Yes||NA||No||High build quality||$314.58|
|Makerbot Replicator 2||285 x 153 x 155||6.8||0.1||$2,199.00||Yes||NA||No||Venture funded||$323.38|
|Makerbot Replicator 2x||285 x 153 x 155||6.8||0.1||$2,799.00||Yes||NA||No||Dual extruder & acrylic casing||$411.62|
|Aleph Objects Lulzbot A0-101||200 x 190 x 100||3.8||0.45||$1,725.00||Yes||400||No||All design files shared||$453.95|
|FormLabs Form1||125 x 125 x 165||2.8||0.025||$3,299.00||Yes||NA||$2,945,885.00||Stereolithography||$1,178.21|
|Beijing Tiertime Up! Plus||140 x 140 x 145||2.8||0.15||$1,499.00||Yes||NA||No||Easy to use||$535.36|
|3D Systems Cube||140 x 140 x 140||2.7||0.2||$1,569.00||Yes||NA||No||Consumer friendly & material cartridges||$581.11|
|Deezermaker Bukobot Mini Green||125 x 125 x 125||2||0.1||$850.00||No||NA||$167,410.00||New Open source framework||$425.00|
|Printrbot Printrbot Jr. Kit||114 x 134 x 102||1.6||0.1||$399.00||No||NA||$830,827.00||Cheap, Assembled for $499||$249.38|
|B9 Creator||51 x 38 x 203||0.4||0.05||$2,495.00||No||NA||$513,422.00||DLP||$6,237.50|
|MiiCraft||43 x 27 x 180||0.2||0.05||$2,299.00||Yes||NA||No||Pico DLP Stereolithography||$11,495.00|
And this brings me to another mystery. Why would these savvy VC investors sell for $400m now? I mean its a nice exit. But, in the last nine months, the company sold 11,000 3D printers in 9 months, according to all of the media articles. So, in a full year, they’d sell 13,750. This would give them a revenue, just in systems and not with filament thrown in, of $38m per year for a five-year-old company with a $10m investment. Seems alright? But, even with all of the interest in consumer 3D printing, they don’t think that they can make a big splash and at IPO get higher than the multiple/valuation that Stratasys was paying? Were they burning money too quickly? Was no one willing to pony up more cash? In the press release, it was stated that the company generated $11.5m in revenue in the first quarter of this year and $15m last year. If they sold a third of their printers in the first quarter, it would leave $3.5m in materials revenue left over, which would be nice and imply that Makerbot’s installed base was buying 72,000 kilos of materials from them a quarter. But, Makerbot’s pricing at around $48 a kilo is much higher than many alternatives at $20 a kilo for material. What if the first quarter unit sales were much higher than 3000 and many Makerbotters had switched to purchasing filament elsewhere? Anecdotal evidence suggests that this is true. Might this explain the VC’s unwillingness to see this through to IPO? A machine plus consumables business that, all of a sudden, wasn’t the cash cow it was spreadsheeted to be? Or was the valuation by Stratasys simply more than they ever thought they were going to get? Did the VC’s know the cat was the wrong color, but Stratasys did know that, even if it was, it would be a good buy? Was future development of the printer hemmed in by Stratasys patents?
Risks/Rewards of the Purchase
Rewards for Makerbot users:
- Improved machines
- Improved product development.
- Higher reliability.
Risks for Makerbot users:
- Loss of startup coolness of Makerbot.
- Company may become more corporate (seems unlikely).
Rewards for Stratasys Management/Shareholders:
- Momentum in Stratasys stock.
- Increased exposure to the desktop 3D printing market.
- Market entry now for all stock transaction.
- Eliminating future competitor.
- “full 3D printing market” product line.
- Increased sexiness for Stratasys brand.
- Higher valuation for Stratasys, P/E etc.
Risks for Stratasys management/shareholders:
- Reduced sales Makertbot due to lower start up coolness.
- Customer complaints due to higher FDM consumables pricing on industrial machines.
- Reduced revenue due to possible cutting of FDM consumables pricing.
Rewards for the 3D printing industry/community at large:
- Better Makerbots.
- A successful exit might prompt more funding.
- Ensuing media attention will move the spotlight away from guns.
Risks for the 3D printing industry/community at large:
- Will the plethora of 3D printing startups now end up in few hands?
- Can the engineering and marketing prowess of both parties eliminate competition?
What other things could Stratasys have done with this kind of money? Although I think that the acquisition was a good deal for them, I think it would have been much better for Stratasys to buy up several metal 3D printing companies. This could have been presented as “the future”, alongside the waves that GE and others are making in the metals space and FDA approval for procedures, real numbers, and patient outcome improvements in metals. Estimates on 3D printing in the medical sector suggest that it may be a $7b a year opportunity. There are many exciting new applications in the automotive and aerospace sectors. Arcam, the company behind EBM technology, makes machines that produce tens of thousands of titanium medical implants a year. It has a market cap of around $22m and revenues of $21m. They could have purchased that, for example, or maybe Realizer, SLM Solutions, Concept Laser, Optomec or Layerwise. The purchase of Arcam and, especially, the purchase of Arcam, Realizer, Optomec and Layerwise would have been a much better investment, in my opinion. This would have given them 5 different metals technologies and would have them well placed to supply industrials with the 3D printers of the future. Both Stratasys and 3D Systems are weak in metals and this would have given them a real USP and an incredible lead on the rest of the industry. I think that the Makerbot purchase is a cat in the bag, but it may yet work out well for Stratasys. Now that they’re on an M&A roll, they should get shopping on these metals firms before the nice people of Rock Hill decide to hoover up those crumbs.
Images: eyedealpostcards.com & fckncg on 3Docean.com