Stratasys + Desktop Metal
Overnight, Bloomberg broke the news that Stratasys was exploring a deal to merge with Desktop Metal. And by morning, the companies had confirmed a definitive agreement to combine their businesses.
The agreement, an all-stock deal, values the combined company at about 1.8 billion USD. It is expected to close in the fourth quarter of 2023, subject to customer closing conditions and the approval of both companies' shareholders, with Stratasys shareholders owning approximately 59% of the combined company and Desktop Metal shareholders owning approximately 41%, in each case on a fully diluted basis.
The prospect of two of additive manufacturing's biggest players merging has everyone talking, and though initially surprising, it is a deal not quite out of nowhere.
Here's what we know so far.
The two have struck an all-stock deal.
Through an all-stock transaction, shareholders are able to trade their current shares in the target company for shares in the acquiring company. This is coming to fruition with Desktop Metal shareholders receiving 0.123 ordinary shares of Stratasys for each share of Desktop Metal Class A common stock the possess.
While this will initially dilute the equity current shareholders have in Stratasys, in theory it will be neutralised by Stratasys obtaining all of Desktop Metal’s assets. The combination of the businesses and their assets, the companies believe, will allow them to generate 1.1 billion USD in 2025 revenue, 'with significant upside potential in a total addressable market of more than 100 billion USD by 2032.'
Typically, stock-for-stock mergers are considered to be more efficient and less complex than cash-for-stock mergers, and would not impact on the acquiring company's cash position. This might be why the deal has received unanimous board approval so quickly. Though with the launch of this new website, it is likely the companies have been in discussions for some time.
M&A is rife, and these two are no strangers to the concept.
Ever since Covid-19, the additive manufacturing industry has been experiencing a wave of M&A activity, with Desktop Metal and Stratasys two of the biggest participants.
Through its takeovers of the likes of EnvisionTEC, ExOne, Aidro and Aerosint, Desktop Metal has acquired nearly a dozen companies, expanding from its initial metal additive manufacturing play into 3D printed polymers, composites, wood, and medical devices. Stratasys, meanwhile, has kept its focus in polymers, but has still picked up the businesses and tech portfolios of RPS, Origin, Xaar 3D, and Covestro Additive Manufacturing.
This activity has occurred in the context of global economic downturn, with war in Ukraine and depleted gas supplies supplementing post-pandemic supply chain issues in making business that much more difficult.
What impact has that had?
Well, when we asked that question to a group of AM experts recently, more than a couple referenced a difficulty in completing machine sales, with purse strings expected to tighten.
For any company, not shifting product in the volume they’d hope is going to affect their revenue streams and ability to turn a profit, but for public companies, it’s also going to impact its stock value.
Desktop Metal went public in December 2020 via a SPAC merger with Trine Acquisition Corp at a value of 2.5 billion USD. Then, the company began trading at around 10 dollars per share, with its stock value peaking at above 30 dollars per share in February 2021. Stratasys also saw its stock value spike in early 2021, up to 50 dollars per share, but in recent months that has dropped back to 11-16 dollars per share. Desktop Metal's stock closed at 1.75 USD on Wednesday May 24, the day the news broke, while a day earlier Stratasys' closing price was 15.26 USD.
It means Desktop Metal’s market cap is currently around the 562m USD mark, some two billion less than it was at the time it listed, and Stratasys’ is at 1.1 billion USD.
Desktop Metal has also undergone two rounds of redundancies and facility footprint consolidations, first laying off 12% of its staff in June 2022, and then 15% of its workforce in February 2023. In Q1 of 2023, Desktop Metal reported that these measures had saved a combined 100 million USD and ‘remained on track to reduce expense structure, expand margins, and drive to profitability.’
So, why is Stratasys interested in Desktop Metal?
Stratasys is already invested in Desktop Metal. Way back when, before Desktop Metal had publicly revealed too much detail about its Studio and Production metal additive manufacturing systems, Stratasys was one of the first companies to provide its financial backing. It also struck a distribution agreement with Desktop Metal in 2017.
While the size of the stake Stratasys has in Desktop Metal is unknown, the company’s founder Scott Crump has also served as Board Observer to Desktop Metal. While this position would not allow Crump to vote on topics discussed by the board, it would allow Crump to attend and participate in Board meetings, giving him access to information provided by and to board members throughout these discussions.
There is also the fact that Stratasys has had a long-standing interest in metal additive manufacturing, without ever successfully commercialising a metal technology. Back in 2018, Stratasys had begun to tease details of its Layered Powder Metallurgy 3D printing process, which was said to be based on its proprietary jetting technology and commonly-used powder metallurgy. This technology has never seen the light of day, with Stratasys instead placing its focus back on polymer AM technologies in recent years, but it was anticipated by many that the company would eventually dip its toe back in the metal 3D printing waters.
When TCT spoke to Stratasys CEO Yoav Zeif last year after it announced its intention to acquire Covestro AM, he confirmed that the company would continue to explore additional M&A opportunities, but in the same breath reiterated that the strategy was centred on polymer technologies.
What about their product portfolios?
Should the businesses combine in Q4 without a hitch, and assuming no brands are discontinued or divested, there would be upwards of 15 brands being offered by the company.
Stratasys has its flagship FDM portfolio; the PolyJet offering via its acquisition of Objet; SLA from the RPS takeover; P3 (DLP) technology from its Origin buy-out; SAF (Powder Bed Fusion) from the Xaar 3D purchase; CAD software through GrabCAD; quality assurance software from Riven; and polymer materials from Covestro AM (and the 3D printing businesses of DSM & Clariant).
Desktop Metal, meanwhile, has supplemented its flagship Studio and Production Systems with ExOne’s binder jet technology; EnvisionTEC’s DLP technology; composite technology via Make Composites; a 3D printed wood capability via Forust; a greater play in the medical space through Desktop Health; a supply of metal parts to heavy industries through Aidro; Freefoam 3D printing through Adaptive3D; a sheet forming technology through Figur; and a multi-material capability through the acquisition of Aerosint.
So… some cross over, and plenty of complementary technologies. Stratasys has no metal at all in its portfolios, so metal binder jet and metal extrusion would be a welcome addition there, while Desktop Metal has no polymer FDM or polymer powder bed fusion to offer. They both have DLP/SLA capabilities, but Origin doesn't have a machine as big as EnvisionTEC. And Desktop Metal might have Adaptive3D’s FreeFoam capability, but they don’t have the deep expertise that Covestro AM boasts when it comes to chemistry.
And the brands?
There is always a decision to be made about branding when a business combination takes place. Through the acquisitions that both Stratasys and Desktop Metal have completed in recent years, some brands have remained at the forefront, while others have been fully consumed.
But a merger like this has its complications in that there would be more than just one brand being incorporated into Stratasys, but also in that Desktop Metal’s marketing is amongst the best in the industry. Since launching back in 2017, it has developed significant brand power, and has led the way on the ‘additive manufacturing 2.0’ messaging that has been picked up by others.
The company was even talk of the town when it didn’t exhibit at the recent RAPID + TCT event, where it usually takes up a large amount of floor space to showcase its extensive product portfolio, as people pondered why the company didn't have its usual presence. Now, we know why.
So, what can we expect?
Well, when the deal goes through, expect Stratasys’ recently appointed VP of Strategy, M&A, and Venturing Hugo da Silva to be extremely busy incorporating Desktop Metal, all its technology suites and its team. In hindsight, Stratasys appointing someone to this dedicated position may be another indicator that this deal has been in the works for longer than the industry was aware.
Unsurprisingly, the companies are using this opportunity to reinforce their goal of achieving true manufacturing with 3D printing. Upon close, the companies expect more than 50% of pro forma combined revenue is expected to be derived from end-use parts manufacturing and mass production.
Backing that up is a combined portfolio of 3,400 patents and pending patent applications; a team of over 800 scientists and engineers; and a combined 500 million USD spent on R&D in the last four years. They also boast 27,000 industrial customers, and have an extensive go-to-market channel.
Combined, the company expects to generate approximately 50 million USD in additional annual run-rate cost synergies by 2025, due primarily to cost reductions in sales, general and administrative expenses, supply chain management and optimisation of operation processes. A further 50 million USD in additional annual run-rate revenue synergies are also expected by 2025 from enhanced market access.
The combined company is targeting 10-12% adjusted EBITDA margins in 2025. Together, Stratasys and Desktop Metal had 437 million USD of cash and cash equivalents as of the first quarter of 2023, and this transaction 'accelerates the combined company’s financial flexibility' through a 'well-capitalised balance sheet to drive future growth.'
Stratasys CEO Yoav Zeif said:
"The combination with Desktop Metal will accelerate our growth trajectory by uniting two leaders to create a premier global provider of industrial additive manufacturing solutions. With attractive positions across complementary product offerings, including aerospace, automotive, consumer products, healthcare and dental, as well as one of the largest and most experienced R&D teams, industry-leading go-to-market infrastructure and a robust balance sheet, the combined company will be committed to delivering ongoing innovation while providing outstanding service to customers."
Desktop Metal CEO Ric Fulop added:
"The combination of these two great companies marks a turning point in driving the next phase of additive manufacturing for mass production. We are excited to complement our portfolio of production metal, sand, ceramic and dental 3D printing solutions with Stratasys’ polymer offerings. Together, we will strive to build an even more resilient offering with a diversified customer base across industries and applications in order to drive long-term sustainable growth."
Zeif has been confirmed as the CEO of the combined company, with Fulop set to assume the role as Chairman of the Board. Upon completion of the transaction, the combined company’s Board of Directors will be comprised of 11 members, five of whom will be selected by Stratasys, and five of whom will be selected by Desktop Metal, plus Dr. Zeif as CEO. Current Stratasys Chairman Dov Ofer will serve as lead independent director of the combined company.
Anything else I should know?
Yes. The Stratasys Rights Plan that was enacted last year to deter the possibility of a hostile takeover attempt from Nano Dimension (who tried three times this year amid a power struggle at the top of the company) has been extended to ensure that all shareholders have a 'meaningful opportunity' to vote on the approval of the transaction and 'preserve for all shareholders the long-term value of the company in the event of a takeover or acquisition of a controlling stake without the payment of a control premium.' The Stratasys Rights Plan will not prevent any person from making a superior proposal pursuant to the terms of the merger agreement.
Meanwhile, the Desktop Metal Board also intends to adopt a limited duration shareholder rights plan, which will be designed to assist the Desktop Metal board in maximising shareholder value in connection with the transaction. Similar to the Stratasys shareholders rights plan, it will not prevent any person from making a superior proposal pursuant to the terms of the merger agreement.
