TCT Magazine
On September 11, 2023, 3D Systems announced the submission of an improved proposal to Stratasys from September 6. The offer would convert each Stratasys share into 7.00 USD in cash and ownership of 46% of the aggregate shares of the combined company. 3D Systems believes this offer is worth more than 27 USD per share to Stratasys shareholders inclusive of synergies.
On September 12, the Stratasys Board unanimously concluded that the revised 3D Systems proposal did not constitute a ‘superior proposal’ to the Desktop Metal merger, and terminated discussions with the company.
Stratasys said that the offer represented a premium of ‘only 3%’ the unaffected closing stock price of Stratasys ordinary shares as of May 24, 2023. The company said that after consultation with its outside financial and legal advisors, and following an ‘extensive due diligence review’ of 3D Systems, the Stratasys Board of Directors unanimously determined that the revised proposal continues to ‘significantly undervalue’ Stratasys.
The Stratasys Board also reaffirmed its unanimous support of the pending combination with Desktop Metal.
Stratasys had agreed to enter discussions with 3D Systems in July 2023, after a revised offer from the company on July 13 was determined to 'reasonably be expected' to result in a superior offer to the Desktop Metal merger.
In the 3D Systems press release announcing the September 6 revised offer, the company said that the new deal resulted from discussions between the two companies and addresses feedback provided by Stratasys during an in-person meeting between directors of both companies on August 22, 2023.
Prior to Stratasys pulling out of the talks, President and CEO of 3D Systems Dr. Jeffrey Graves said: “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.”
3D Systems listed the updates to the July 13 offer:
- 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.
Read more:
A complete timeline of the Stratasys + Nano Dimension + Desktop Metal + 3D Systems story (so far)
Stratasys’ largest shareholder Nano Dimension to vote against Desktop Metal merger
Stratasys shareholders to vote on Desktop Metal merger at upcoming meeting
Stratasys and Desktop Metal receive second information request from DOJ’s Antitrust Division
Stratasys to enter discussions with 3D Systems despite Desktop Metal merger agreement
TCT Interview – Stratasys CEO Yoav Zeif details the strategy behind Desktop Metal merger
Stratasys and Desktop Metal to merge in deal worth $1.8 billion
When Stratasys announced the termination of talks with 3D Systems, it issued the following statement:
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.
The Stratasys Board has reaffirmed its unanimous approval, recommendation, and declaration of advisability of the transaction with Desktop Metal.
As announced on August 23, 2023, Stratasys will hold an Extraordinary General Meeting of Shareholders on Thursday, September 28, 2023, where shareholders can vote on the approval of certain matters in connection with the Desktop Metal merger agreement. Desktop Metal shareholders are also set to vote on the merger in a separate meeting on the same date. Stratasys' largest shareholder Nano Dimension, owner of 14.1% of the ordinary shares of the company, announced on September 14, 2023, that it would vote against the Desktop Metal merger.
