Behind the scenes of the Stratasys, Desktop Steel, 3D Methods, and Nano Dimension merger transaction

Stratasys, Desktop Steel, 3D Methods, and Nano Dimension merger transaction

June started with information that plans for 3D Methods’ merger with Stratasys have been now public. Since then, 3D Printing Trade has spoken with plenty of folks aware of the continued course of. With Nano Dimension and Desktop Steel drawn into this four-way M&A, the continued transaction is in contrast to something they’ve seen earlier than, in response to one individual I spoke with.

This text will try to convey you on top of things on the newest developments. Nevertheless, I can’t promise that extra information is not going to be introduced earlier than you end studying. 

A short timeline of latest occasions within the 3D Methods, Stratasys, Desktop Steel, and Nano Dimension takeover battle/merger

20 June 2023 Credit score Suisse’s Shannon Cross points seven-page analysis bulletin on the rejection of newest 3D Methods bid for Stratasys.

27 June 2023 – 3D Methods will increase provide to purchase Stratasys. The brand new proposal entails changing every Stratasys peculiar share into $7.50 in money and 1.3223 newly issued shares of 3D Methods widespread inventory. This implies Stratasys shareholders would personal roughly 41% of the mixed firm and obtain round $540 million in money. Mixed fairness and money worth the deal at $20.72 (DDD SP $10 x 1.3223 = $13.22  + $7.50 = $20.72).

27 June 2023 – Nano Dimension will increase partial tender money provide to amass Stratasys from $18.00 to $20.05.

28 June 2023 –  Lake Road Capital Markets’ Troy Jensen publishes a five-page report entitled Merger Mania Half II – The Good, The Dangerous, and The Ugly. 

29 June 2023 –  Donerail, a 2.3% shareholder in Stratasys, publishes an open letter supporting the 3D Methods takeover of Stratasys.

30 June 2023 – Stratasys points responses to Nano Dimension and 3D Methods, saying provides will not be superior to Desktop Steel deal.

Bear in mind right here that J.P. Morgan is appearing as monetary advisor to Stratasys with Goldman Sachs aiding 3D Methods, fairness analysis corporations, analysts, and shareholders will not be uninterested events. With this in thoughts, I’ll run by means of the important thing factors of every timeline occasion and add a brief level to contemplate for every.

That is in all probability the best time to placed on the kettle and put together a cup of tea.

Credit score Suisse Analysis Bulletin on Stratasys, Desktop Steel, and 3D Methods 

On this analysis, it’s advised that 3D Methods may doubtlessly improve the alternate ratio to ~1.7 and provide ~$24/share whereas sustaining ~51% management, a rise that beforehand led to a constructive inventory response. Stratasys has basically set a ground worth of $30/share for its personal worth when mixed with Desktop Steel. In previous years, 3D Methods submitted a number of bids to amass Stratasys; nonetheless, due diligence processes didn’t end in an acquisition.

A merger between Stratasys and Desktop Steel is seen as offering higher long-term alternatives, together with the scaling of Desktop Steel’s know-how and integration with Stratasys’ mature operations. Regardless of a possible short-term improve in profitability from a merger with 3D Methods by means of price reductions, long-term development is seen as restricted, in response to the analyst.

Credit score Suisse proceeds to set out its goal costs, scores, valuation methodology, and the dangers related to these scores. For ease of reference, the scores and goal costs and people from Lake Road Capital are introduced beneath.

3D Methods’ underperform ranking and $7 goal worth relies on 1.3x EV/2024 gross sales, in comparison with the present 1.8x EV/2024 gross sales valuation.

The present valuation could contemplate long-term bioprinting initiatives, that are thought of troublesome to worth as a result of restricted financials and an unpredictable timeline. Dangers to the ranking, i.e. that an alternate ranking could also be extra acceptable, embrace elevated consciousness and training of additive manufacturing, the potential for M&A, {industry} consolidation, alleviation of the macro atmosphere and provide chain challenges, and success in printing organs and tissues.

Desktop Steel will get a impartial ranking and the $2.00 goal worth relies on 2.2x EV/2024 gross sales in comparison with the present 2.1x valuation. DM could possibly be seen as a possible takeover candidate, however first, the portfolio would have to be cleaned up as a result of a number of disparate belongings acquired in recent times, in response to the analyst.

Dangers embrace the shortcoming to enhance the money burn charge, deterioration within the macro atmosphere, modifications within the tempo of additive manufacturing adoption, {industry} consolidation, and overachievement of cost-reduction targets with out impairing income development.

Stratasys receives an outperform ranking and $20 goal worth, that is based mostly on 1.5x EV/2024 gross sales, in comparison with the present 1.1x EV/2024 gross sales valuation. Credit score Suisse says Stratasys is believed to deserve a premium as a result of decrease buyer focus and administration’s technique that targets cross-selling and leveraging current IP. Operationally, Stratasys is seen because the strongest additive inventory to personal as a result of demonstrated expense self-discipline and a transparent, centered technique.

Dangers embrace the shortcoming to promote new applied sciences into current shopper accounts, integration of M&A, slower market adoption of additive, greater buyer acquisition prices as a result of elevated competitors, macroeconomic headwinds, and potential disruption in gross sales from NNDM’s efforts to amass Stratasys.

Why is that this of curiosity? Shannon Cross at Credit score Suisse states the merger of Stratasys and Desktop Steel offers higher long-term worth and flags $30/share (the mixed worth of Desktop and Stratasys) as the worth 3D Methods must beat.

3D Methods will increase provide to purchase Stratasys – investor name with Jeffrey Graves, President, CEO & Director

A particular investor name on June twenty seventh aimed to debate 3D Methods’ revised proposal to amass Stratasys.

The brand new proposal entails changing every Stratasys peculiar share into $7.50 in money and 1.3223 newly issued shares of 3D Methods widespread inventory. This implies Stratasys shareholders would personal roughly 41% of the mixed firm and obtain round $540 million in money.

As of the market shut on June 26, this proposal equates to a price of round $20 per share, roughly a 33% premium to Stratasys’ closing share worth on Could 24, 2023. The mix is most well-liked as a result of perceived scale, synergies, and an industry-leading monetary profile. It is a response to the proposed Stratasys and Desktop Steel transaction.

The mix of 3D Methods and Stratasys would create a worldwide chief within the additive manufacturing house, round 50% bigger in income than the proposed Stratasys and Desktop Steel mixture. 3D Methods means that its provide is superior to the Desktop Steel mixture as a result of its scale and monetary power. The {industry} is ready to develop at a 21% CAGR over the following 5 to 7 years, creating an $80 billion complete addressable market.

There may be development potential within the dental and regenerative medication enterprise regardless of near-term headwinds as a result of inflationary pressures and provide chain points. The corporate additionally believes its work in regenerative medication is extremely progressive and may considerably improve shareholder worth. It has three alternatives on this house: human organs, human non-organ tissue, and drug improvement.

The mix with Stratasys would offer a complete know-how portfolio with minimal overlap and significant income alternatives.

They mission a mixed income of over $1 billion and $145 million in EBITDA for 2023. This, they declare, is a big enchancment over the monetary profile of a Stratasys and Desktop Steel mixture.

3D Methods believes that its monetary profile will end in a horny near-term outlook representing double-digit income development, environment friendly R&D spending for sustainable innovation, and 15-plus p.c EBITDA margins. They suggest that their provide represents a complete worth of roughly $20 per Stratasys share. After together with $100 million of synergies, their revised provide equates to roughly $26 per Stratasys share or an uplift of roughly 71%.

3D Methods expressed skepticism in direction of the Desktop Steel merger, criticizing its reliance on assumptions they view as unfounded and unreasonable. They notice that Desktop Steel has a historical past of fueling top-line development by overpaying for unprofitable and poorly performing belongings, main to 2 goodwill impairments for a mixed complete of $500 million.

3D Methods Company challenges the perceived potential of binder jet know-how, as touted by Stratasys, asserting that their very own laser mattress fusion know-how is extra superior and higher for the way forward for mass-produced metals. Throughout the name, they mentioned their proposal provides a bigger and extra worthwhile firm than the Desktop deal, which they consider relies on speculative financials, inferior know-how, and a poor acquisition and integration monitor file.

By way of potential antitrust issues, 3D Methods highlights the restricted overlap of their product portfolios and the existence of numerous opponents within the 3D printing {industry}, together with smaller companies and bigger corporations like GE, HP, and Nikon.

3D Methods beforehand made a strategic resolution to exit the on-demand part-making enterprise, to keep away from competing with their prospects. They consider this technique continues to be relevant within the potential merger with Stratasys, however they’re open to revisiting selections based mostly on detailed evaluation.

The corporate is prepared to supply a set money quantity of round $540 million for shareholders, which may differ based mostly on particular person shareholder choice. There are not any present plans to extend the full money quantity by means of leveraging if shareholders choose money over fairness.

Jeffrey Graves, President, CEO & Director, believes the short-term and long-term worth mixture for his or her shareholders is right, notably contemplating new markets like regenerative medication. 

Graves doesn’t see the merger with Stratasys as a way of supporting the regenerative medication sector. Reasonably, he believes the mixed portfolio will enable them to supply a broader vary of know-how to every market vertical, enhancing each their core companies – healthcare and industrial.

The executives argue that the core enterprise of the corporate, even with out counting the regenerative medication section, guarantees wonderful development prospects and EBITDA efficiency by means of the mix with Stratasys. Sooner or later, the corporate doesn’t plan on divesting any core applied sciences; each corporations’ printing applied sciences, supplies, and software program are seen as invaluable belongings.

Whereas acknowledging investments in binder jetting know-how by different corporations, Graves is evident that he sees direct laser sintering of steel powders as a extra confirmed and dependable know-how, presently in manufacturing and assembly 80% of market functions. 

Why is that this of curiosity? 3D Methods is persistent. There’s a want to keep away from a hostile takeover. 3D Methods believes that this deal provides one of the best worth for the additive manufacturing house, its shareholders, and Stratasys shareholders. In keeping with one individual aware of the deal, confidence lies within the probability that Nano’s tender received’t materialize and the overall market’s response to the Desktop Steel transaction, in comparison with a constructive motion in 3D Methods’ share worth submit deal announcement. They believe Stratasys has rejected their provides as a result of it permits their management staff to keep up management, doubtlessly on the expense of shareholder worth. There are additionally doubts over the $30 per share valuation advised by Credit score Suisse, and included in Stratasys’ investor presentation, indicating that it’s based mostly on speculative income synergies, that are usually discredited in M&A conditions, as a result of their unsure nature.

In keeping with one supply 3D Methods can proceed with the transaction with out elevating extra money, as verified by monetary advisors. The identical individual confirms that many main shareholders have purchased into the method, acknowledging the worth within the 3D Methods transaction. The mixed steadiness sheet, post-transaction, will, by their calculations, have round $150 million. Whereas neither firm is presently worthwhile, they’re each taking part in the dimensions and leverage sport, seeking to the long run. 

An upcoming Desktop Steel shareholder vote is seen as a significant juncture. This vote will point out whether or not Stratasys shareholders approve of the administration’s selections and can play a vital function in figuring out the way forward for the merger, appearing in no small approach as a referendum on the deal. An up to date SEC submitting is predicted within the coming weeks, this may present the date.

Merger Mania Half II – The Good, The Dangerous, and The Ugly 

Extra institutional investor analysis now, this time from Troy Jensen at Lake Road Capital Markets. 

The divertingly titled report kicks off with a quick breakdown of the newest proposal from Nano Dimension and 3D Methods. 3D Methods has elevated their provide for Stratasys, now providing shareholders 41% of the mixed firm (up from 40%) which equates to about $20.76 per share. Nano has elevated their provide worth to $20.05 per share, believed to be their highest inexpensive worth given their want to keep up money reserves for his or her unprofitable operations.

Nano Dimension’s first public tender providing for Stratasys failed, with solely an estimated 8% of shareholders accepting their provide of $18 per share. The analyst means that if scalability is required for wholesome profitability, a merger between 3D Methods and Stratasys could make extra sense. 

Lake Road then proceeds to evaluate every enterprise mixture. Let’s begin with 3D Methods and Stratasys: “The Good.” 

3D Methods would possibly nonetheless improve the provide with extra shares or money, however they’re restricted to utilizing too many shares as they will’t provide greater than 49.9% of the mixed firm. They’re additionally cautious of overextending their steadiness sheet. The proposal is favorable should you consider the additive manufacturing {industry} wants scalability. In that case, a mix of 3D Methods and Stratasys appears probably the most smart.

Issues have been initially raised about product overlap between 3D Methods and Stratasys, particularly in markets the place each have been lively. Nevertheless, after discussions with the corporate, it appears the income overlap is considerably totally different as a result of their distinct focuses in several applied sciences.

Overlapping investments in analysis and improvement, gross sales and advertising and marketing, and provide chain efficiencies are recognized as main drivers of price synergies within the mixed firm. Regardless of the favorable features of a merger with 3D Methods, Stratasys appears decided to stay an impartial firm and is prone to reject the DDD provide, selecting to proceed with their deliberate merger with Desktop Steel.

Lake Road name the following mixture, Desktop Steel and Stratasys, The Dangerous noting each Desktop Steel and Stratasys confirmed their steerage regardless of potential gross sales disruption as a result of merger bulletins, which may have an effect on Q2/Q3 demand and trigger Desktop Steel to battle to fulfill their steerage.  Stratasys could be absorbing an unprofitable enterprise, Desktop Steel, that has persistently missed its monetary forecasts. There may be skepticism across the development forecast included into their 2024-26 income and profitability steerage.

The analyst factors out potential points like product overlap, channel conflicts, and enterprise segments that Stratasys has not proven curiosity in, together with dangers of integration and product rationalization.

The mixed firm of Stratasys and Desktop Steel claims to generate $50 million in annual gross sales synergies. Nevertheless, there’s doubt about this as a result of vital know-how overlap and the opportunity of product line rationalization. The declare that 100% of components made on Desktop Steel machines are end-use components is challenged as unrealistic.

Lake Road mentioned, the merger is perceived as a determined transfer by Stratasys to lift their mixed market cap past Nano Dimension’s shopping for energy, slightly than a strategic transfer. Stratasys could have been concerned about Desktop Steel’s steel merchandise as a result of their lack of publicity to steel, however they didn’t appear to need the EnvisionTEC product strains, which that they had a number of alternatives to purchase earlier than. The proposed merger dilutes the worthwhile development story of Stratasys with the unprofitable enterprise of Desktop Steel.

The merger is an all-stock transaction, valuing Desktop Steel at $1.8 billion. DM shareholders will obtain 0.123 shares of SSYS inventory, which represents $1.83 per share. Stratasys shareholders will personal roughly 59% of the mixed firm, with DM shareholders proudly owning the remaining 41%.

The transaction is predicted to be accomplished in This fall 2023 with Yoav Zeif main as CEO and Ric Fulop as Chairman of the board.

The ultimate piece of study from Lake Road is “The Ugly” – Nano Dimension and Stratasys

Nano Dimension has been persistently making an attempt to amass all or a majority of Stratasys for a number of months, with Stratasys persistently rejecting these provides as a result of valuation and authorized issues; the best bid from Nano has been an all-cash provide of $20.05 per share.

Nano tried to bypass the Stratasys board by straight providing Stratasys shareholders $18 per share by means of a public tender provide, however this was unsuccessful with solely 8% of shares tendered. Nano owns almost 15% of Stratasys shares and wishes greater than 50% for controlling curiosity. The corporate elevated its public tender provide to $20.05 per share and lowered the sought shares from 38.8%-40.8% to 31.9%-36.9%.

The analyst means that Nano might want to attain the midpoint to amass a majority place if solely 31.9% of shares tender. The success of Nano’s acquisition try is believed to be depending on upcoming Israeli court docket selections relating to the legality of Stratasys’ poison capsule and a latest Nano shareholder vote to take away a number of board and administration staff members.

If Nano loses both court docket case, the analyst predicts an finish to their try to amass Stratasys, but when they win each instances, the following key date is July twenty sixth, when the $20.05 public tender provide expires.

The analyst urges Nano to comprehend that institutional buyers don’t help their try to amass Stratasys, with previous makes an attempt seen as not severe as a result of giant unfold between the provided and buying and selling worth of Stratasys’ inventory.

A merger between Stratasys and Nano is just not anticipated to yield the identical scale efficiencies as potential mergers with Desktop Steel or 3D Methods would, and it could additionally result in a sophisticated scenario if Nano have been to personal barely greater than 50% of Stratasys’ inventory, which might end result within the remaining shares being extraordinarily illiquid and unattractive to different institutional buyers.

Donerail, a 2.3% shareholder in Stratasys, publishes an open letter supporting the 3D Methods takeover of Stratasys

In keeping with an open letter printed by The Donerail Group LP, they’re, a significant shareholder of Stratasys, who personal roughly 2.3% of the corporate’s excellent shares. Donerail relies in Los Angles and led by William Z. Wyatt, Managing Accomplice.

The letter states that regardless of makes an attempt by Donerail to fulfill privately with the Stratasys Board of Administrators to debate strategic initiatives, their requests have been persistently ignored.

Donerail expresses issues over the corporate’s governance and strategic path, heightened by latest conferences and particulars from regulatory filings. The Donerail letter criticizes the Board for neglecting fiduciary duties by refusing to have interaction with potential consumers concerned about buying the corporate up to now two years.

They write that since January 2021, Stratasys has acquired a minimum of 12 unsolicited acquisition proposals from three totally different potential consumers, as disclosed in a June twentieth regulatory submitting.

Most of those provides have been rejected by Stratasys with out engagement, which Donerail argues has been expensive for the shareholders. The Board did interact with one provide – from Desktop Steel Included in March 2023, which as a substitute of a sale resulted in a dangerous merger, not nicely acquired by the funding group.

The letter states that Stratasys’ inventory worth dropped 10% following the merger information, and analysts criticized the transfer as a result of absorption of an unprofitable enterprise. In a gathering on June twenty first, Stratasys’ CEO, Dr. Yoav Zeif, confirmed that the Board is now “working for shareholders” and dedicated to doing the “proper factor” for shareholders, regardless of the corporate’s historical past of rejecting engaging acquisition bids.

The provide from 3D Methods is seen by Donerail as notably promising and warrants speedy engagement as a result of its elevated proposal providing a mix with a strategic social gathering in a money and inventory deal valuing Stratasys at a 27% premium to Monday twenty sixth June’s closing buying and selling worth.

Donerail praises the Board for his or her dedication to reviewing the revised merger proposal from 3D Methods and urges a fast evaluation earlier than partaking straight with 3D Methods to optimize the provide for Stratasys shareholders.

The Board’s earlier inclusion of language within the Desktop Steel merger settlement, permitting them to have interaction with an unsolicited suitor if the proposal is “moderately prone to result in” a superior provide, is taken into account by Donerail to be a clever transfer within the present scenario. Donerail encourages the Board to behave of their capability as fiduciaries to barter and announce a transaction in response to 3D Methods’ renewed proposal.

The letter continues to induce the Board to comply with its dedication to “work for shareholders” and abandon the Desktop Steel deal in favor of a extra engaging deal. After two years of rejecting prepared suitors, the Board is implored to be aware of its fiduciary obligations to shareholders and to not have an inflated view of an execution story stuffed with challenges.

Donerail hopes that no additional motion past this letter will likely be obligatory and expects the Board to be correctly suggested on learn how to proceed. Donerail is prepared and open for communication at any time with the Board, administration staff, or any shareholder.

Why is that this of curiosity? In keeping with an individual aware of the events concerned, Donerail was invited to fulfill with Goldman Sachs, the 3D Methods advisor. This assembly request is taken into account uncommon, because it occurs solely every year or two. In keeping with the supply, this signifies an curiosity in stirring issues up. Donerail, a self-described “value-oriented, activist” investor, had beforehand taken a place in Turtle Seashore, a gaming accent producer.

Wait, there’s extra…

Stratasys has responded to the revised provides from Nano Dimension and 3D Methods and seems to be going forward with the Desktop Steel deal. Stratasys writes, “[3D Systems offer is] an approximate 3% improve in complete worth, including 1% to the full possession for Stratasys shareholders, is opportunistic, continues to materially undervalue Stratasys, doesn’t represent a “Superior Proposal” and doesn’t present a foundation upon which to enter into discussions with 3D Methods, pursuant to the phrases of the merger settlement with Desktop Steel, Inc.”

This quick rejection prompted 3D Methods CEO and President Dr. Jeffrey Graves to say, “The Stratasys Board has made the perplexing resolution to not interact with us to achieve a mutually agreed upon, pleasant transaction that we consider would unlock worth for all shareholders. Frankly, we’re shocked that of their fast rejection, Stratasys’ Board didn’t acknowledge or refute the deserves of our proposed transaction, or reply to the market’s issues in regards to the worth destruction of the Desktop Steel merger.”

Graves continues, “We’re listening to from a spectrum of Stratasys shareholders that they perceive and consider {that a} mixture between 3D Methods and Stratasys provides an unparalleled possibility for certainty, scale and long-term development. This suggestions from Stratasys’ personal shareholders solely strengthens our conviction that that is the best deal on the proper time. It’s regarding that, as public firm administrators, the Stratasys Board is ignoring these indicators from its buyers. It’s obscure their rationale, which we predict raises questions as to whether or not they have entrenched themselves able that demonstrates an absence of deal with maximizing shareholder worth.”

With the quantity of knowledge, already printed, it’s fairly attainable to lose monitor of who mentioned what and when. Listed here are a few latest exchanges that is perhaps of curiosity

Proclamations across the transaction are pitching a sort of steel 3D printing shoot-out with  Binder Jet set in opposition to DMLS. Now given the events concerned, it could be acceptable to take these statements with a grain of salt. 

Examine the assertion of 3D Methods to this one from Credit score Suisse, “3D Methods does have a steel portfolio, although the techniques are extra ideally suited for low quantity high-cost functions and the know-how is extra mature (e.g., DMLS techniques used to print rocket components).” 

The 3D Methods aspect, “We don’t suppose we’re alone in believing that our metals know-how is best and extra superior. On the following slide, you’ll be able to see that our know-how, laser mattress fusion generated 84% of all metals {hardware} income within the {industry} final yr. To place this in perspective, that’s 21x higher market share than binder jetting, a know-how that, once more, is almost 3 many years outdated.”

“The issue is that the long run is already 28 years outdated, we consider shareholders must be clear {that a} vital piece of the binder jet know-how touted by Stratasys’ administration was acquired by Desktop Steel after they purchased ExOne in 2021. In our view, ExOne is a enterprise the {industry} and the market know very nicely and is but to show viable for mass manufacturing or to generate any revenue. Its efficiency previous to the acquisition by Desktop Steel doesn’t level to the expansion potential that Stratasys administration is claiming,” mentioned the 3D Methods CEO.

Dental 3D printing is one other enviornment the place the statements are mounting up. Right here’s Credit score Suisse, “The bottom case assumptions [supporting the Desktop and Stratasys deal] are largely pushed by the scaling of DM’s steel binder jet know-how and restorative dental enterprise.”

Over to 3D Methods, “We consider that we now have, by far, probably the most profitable dental enterprise within the 3D printing universe. The near-term headwind on our outcomes is principally a results of latest inflationary pressures on shoppers and stock buildup associated to produce chain in our orthodontics enterprise. Excluding our dental enterprise, income grew 12% year-over-year in Q1 on a continuing forex foundation, with 9% development in our industrial enterprise, and 22% development in our healthcare enterprise, excluding dental.”

So, sure, however present stress on client spending 3D Methods dental enterprise is prospering, A reality that won’t have gone unnoticed by opponents who may search a share of the almost $40 billion world dental market.

The place subsequent? It could appear issues will not be ramping down; certainly, they might be simply getting began.

Much more? What do analysts consider the 3D Methods, Stratasys and Desktop Steel deal?

What does the way forward for 3D printing for the following ten years maintain?

What engineering challenges will have to be tackled within the additive manufacturing sector within the coming decade?

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Featured picture reveals 3D Methods Healthcare Expertise Heart. Picture by Michael Petch.