The Stratasys (Nasdaq: SSYS) Board of Directors unanimously determined that the revised proposal that it received from 3D Systems Corporation on September 6th continues to significantly undervalue Stratasys and does not constitute a “Superior Proposal”, as defined in Stratasys’ merger agreement with Desktop Metal, Inc. (NYSE: DM) (“Desktop Metal”). The Board also expressed “serious concerns about 3D Systems’ short- to medium-term growth prospects” and “serious concerns regarding the ability of 3D Systems’ management team to run a combined company”. As Nano Dimension has already quietly abandoned its takeover prospects, this should put an end to the ongoing saga and allow Stratasys to complete the merger with Desktop Metal.
This, VoxelMatters believes, was always the most likely and also the most desirable outcome for Stratasys, as it enables the current management led by Yoav Zeif to maintain control of the combined company, gain access to highly strategic metal binder jetting technology, and continue on the virtuous path it undertook a few years ago, turning the company around (not without some significant challenges to face). Stratasys stocks remain significantly undervalued, reflecting investors’ low confidence level, but this is currently true for just about any pure-player 3D printing company.
The last offer
On September 6, 2023, Stratasys received a revised proposal from 3D Systems Corporation (NYSE: DDD) to acquire Stratasys for $7.00 in cash and 1.6387 newly issued shares of 3D Systems common stock per ordinary share of Stratasys, representing a value of $15.26 per share for Stratasys, and a premium of only 3% to the unaffected closing stock price of Stratasys ordinary shares as of May 24, 2023.
After consultation with its outside financial and legal advisors, and following an extensive due diligence review of 3D Systems, the Stratasys Board Accordingly, the Stratasys Board has terminated discussions with 3D Systems. The Stratasys Board reaffirms its unanimous support of the pending combination with Desktop Metal. After a long quiet period, Desktop Metal re-emerged yesterday with news of one of the largest installations of its metal binder jetting systems, in a deal with FreeFORM for a total of 25 machines running at the Pennsylvania-based service provider. While this is a long shot from its founders’ initial vision, it is a significant step in the right direction.
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.
Stratasys expressed several concerns which, to be honest, were quite clear to anyone who has been following the financial evolution of the AM industry over the past few years. One is that there are significant worries about the short- to medium-term growth prospects of 3D Systems. On August 9, 2023, 3D Systems reported its Q2 results, which not only fell short of its own projections but also disappointed market expectations. This led to a substantial downward revision of its fiscal estimates for 2023.
Another major concern centers on Align Technology, Inc. (“Align”), which, according to the Stratasys statement, accounts for 23% of 3D Systems’ revenues. It is expected that Align will pose significant growth challenges for 3D Systems, as there is a likelihood that Align will transition to using multiple-source printing technology over time. Earlier concerns had already been raised about Align moving away from 3D Systems’ stereolithography technology in favor of DLP technology for both indirect and direct printing of appliances and other supplies. The recent acquisition of Cubicure GmbH by Align, known for its strength in direct 3D printing of appliances, further reinforces these concerns. The outcome remains highly uncertain regarding the market share and margins that 3D Systems can maintain in the future as Align expands its solutions and other alternatives emerge. This situation raises questions about whether the current market valuation accurately reflects the true intrinsic value of 3D Systems’ business.
There are also structural challenges affecting 3D Systems’ path to achieving attractive profitability. The company’s portfolio currently operates at gross margins significantly lower than those of Stratasys, with 3D Systems at 39% and Stratasys at 49%. Should 3D Systems’ dental business decline due to Align shifting its sourcing, the profitability of 3D Systems could deteriorate further, making it challenging to achieve attractive long-term operating margins for a combined company.
Furthermore, the potential for net synergy is considerably lower than what 3D Systems has been suggesting. Their claim of cost synergies exceeding $110 million lacks credible support. Stratasys mentions independent analysis from a leading consulting firm estimating annual cost synergies to be between $74 million and $88 million associated with the merger. Additionally, there is the prospect of approximately $50 million in annual negative revenue synergies, an aspect acknowledged by 3D Systems. This suggests that a portion of the business could be lost as a result of the merger.
A very unlikely merger
The merger between Stratasys and 3D Systems faces significant regulatory consummation risks and an extended timeline for closing, which could range from 9 to 18 months. This extended timeline introduces the risk of employee attrition. Despite repeated requests, 3D Systems has not provided an operational or integration plan, making it challenging to assess which Stratasys employees would be crucial for the combined company’s execution of its business plan.
Stratasys also expressed serious doubts about the ability of 3D Systems’ management team to effectively run a combined company. 3D Systems’ management team has consistently failed to meet its own cost reduction targets, further fueling concerns about its capacity to achieve the target cost synergies. In contrast, Stratasys’ management team has demonstrated superior performance. From 2021 to 2023, based on mid-point guidance, 3D Systems’ revenue declined by one percent (adjusting for divestitures), while Stratasys’ revenue grew by six percent (adjusting for divestitures). Given the short- to mid-term growth challenges faced by 3D Systems, any decline in its business may further widen this gap.
As a result of a comprehensive review and consultation with external financial and legal advisors, the Stratasys Board has concluded that 3D Systems’ most recent revised proposal does not meet the criteria for a “Superior Proposal,” as defined in Stratasys’ merger agreement with Desktop Metal. Consequently, Stratasys has chosen to terminate discussions with 3D Systems.