2023-07-13 12:55:38 ET
Summary
- Stratasys' shareholders are in the driver's seat after 3D Systems raised its offer.
- Stratasys' Board is being pressured to consider the deal.
- Shareholders may sell now and take profits or hold out for more.
Stratasys (SSYS) is in a commanding position. It has not one, but two suitors who want to take over the company. Nano Dimension (NNDM) increased its offer to buy SSYS stock for $24 a share . This is up from $20.05. With much embarrassment for Nano Dimension's management, Stratasys shares did not move at all.
3D Systems (DDD) returned to the bidding table by offering $24.07 , two cents more than Nano's offer. SSYS stock gained a decisive 11%. Shareholders should not dismiss the market's reaction. It is already voting on the odds that the implied $28-a-share deal will proceed.
3D Systems/Stratasys Deal Terms
3D Systems announced an enhanced, binding offer to combine with Stratasys . Stratasys shareholders will get $7.50 in cash and 1.5444 shares of the combined firm. The implied value is $28 per Stratasys share. Dr. Jeffrey Graves, the Chief Executive Officer of 3D Systems, emphasized the deal is a friendly combination with Stratasys.
3D Systems said that it has multiple large Stratasys shareholders who reached out to the firm to push the deal to move forward. The firm is counting on cutting costs, through $100 million in synergies. This would increase shareholder value for investors holding the combined firm after the deal closes.
3D Systems would pick up the termination fee that would be payable to Desktop Metal.
CEO Graves depicted the transaction as the superior proposal. The CEO cited the motivation to improve "the value, certainty and transparency" of its proposal. The 3D Systems leadership team needs to engage in a dialogue with Stratasys management from here. Will that happen?
Shareholder Pressure
Stratasys counted on the inferiority of 3D Systems' previously revised offer compared to that of Nano Dimension to reject it. The market's reaction to the $24 a share offer pressures Stratasys management in accepting a deal.
The cost synergies from the combined firm will remove duplications at the management level. Unless 3D Systems offers generous termination packages, Stratasys will likely recommend that its shareholders reject the deal. Before the offers from Nano and 3D Systems, SSYS stock traded in the $11-$13.70 range. With economic headwinds ahead, Stratasys will have difficulty in convincing shareholders that it will increase the company's value on its own.
Outlook
On the Q1/2023 conference call , Stratasys said it set a billion-dollar revenue target. Analyst Shannon Cross said that the industry set such targets in the past, only to fail to achieve them. This created stock volatility.
Stratasys CEO Yoav Zief said that its targets rely on planning based on a three-year strategy. For now, the firm delivered results above expectations on a quarter-over-quarter basis. As a result, CEO Zief believes it will achieve a $1 billion revenue target, double-digit operating income growth, and a gross margin above 50%. In addition, it has EBITDA growth targets above 15%.
The CEO expects material positions like Covestro, acquired in April , will set a path to profitability. Conversely, Stratasys has products in the early phase of meaningful revenue. TrueDent, a resin for the dental industry, is in the use case phase. The CEO is vague about how the automotive end-use parts and software contribute to the $1 billion in revenue.
Probability of Deal
3D Systems is barely bigger than Stratasys by market capitalization. Still, Stratasys' market cap increased to $1.32 billion after the revised bid. By comparison, 3D Systems has a $1.43 billion market capitalization. Short sellers hold a 7.92% short interest against the stock compared to 1.13% on SSYS shares. Short-sellers are also betting against Nano Dimension with a 7.29% short interest. Nano's market cap is $795 million.
Arbitrageurs may refer to Seeking Alpha's quant factor grades to realize why the DDD/SSYS combination makes sense. Stratasys has the strongest relative profitability. It scores a C, compared to 3D Systems' grade of D.
3D Systems is ahead of Stratasys on the growth grade. If it combines Stratasys and cuts costs, growth and profitability should improve. Valuations will not improve. The 3D printing market struggles to appeal to the mass market. This hurts the prospects of gross margin expansion.
My Takeaway
Watch for the response of Stratasys' board, after it confirmed receipt of the deal . The stock markets already voted on the strong likelihood of the combination proceeding. Shareholders are in a win-win position. They may sell now, betting that the board rejects the deal. This locks in the 10% gain.
Alternatively, investors may hold the stock, but the value of the deal will fluctuate, moving alongside that of DDD stock.
For further details see:
What To Do With Stratasys After 3D Systems Raises Offer