It seems the Stratasys takeover / merger saga has taken a turn.
Thursday last week was the date for the special shareholder vote at Stratasys. The vote was to decide whether shareholders agreed with company management’s proposal to merge with Desktop Metal. A deal had been struck with the company some months ago, pending approval by shareholders.
Friday Stratasys announced that a preliminary count of shareholder votes indicated that the Desktop Metal merger proposal had not passed. This is notable, because a “preliminary count” means even though not all votes were cast, a majority negative vote was already counted. It seems as if a large proportion of Stratasys shareholders didn’t want the merger to proceed.
That is understandable, given that Nano Dimension, a rival company that previously attempted a takeover, said they were voting “NO” with their 14.5% of the company shares. In addition, several analyst firms recommended against the merger.
Finally, there’s 3D Systems. That company also launched takeover bids for Stratasys over the past few months, all of which were rejected by Stratasys management. It may be that some Stratasys shareholders were more interested in a 3D Systems proposal than the Desktop Metal merger and voted accordingly.
It’s possible that there could be more short-term value in a 3D Systems – Stratasys hookup than with a Desktop Metal merger. However, long term outcomes might be quite different. Nevertheless, shareholders typically are more interested in short term gains, and that could be the case here.
What happens next?
3D Systems provided one “final” offer to Stratasys before the vote, and it was a “binding offer”. That meant it’s already signed by 3D Systems and only requires Stratasys agreement. The deal is set to expire five days after the vote, which is this week.
With the Desktop Metal merger rejected, will Stratasys take up the 3D Systems’ binding offer? I’m thinking no, because the offer was not substantially different from their prior offers, and in the meantime 3D Systems valuation has been cruising downward substantially. Because the 3D Systems proposal involves their company’s shares, the value of those shares continues to drop. That makes the deal less attractive.
Stratasys announced they have “initiated a process to explore strategic alternatives for the company”. That means they’re back to the drawing board as far as mergers and acquisitions.
There are quite a number of possibilities:
- They could accept the 3D Systems binding agreement, but I think this is unlikely
- They could engineer a different Desktop Metal merger that might be more attractive to shareholders, but that’s unlikely, too
- They could re-engage with 3D Systems to cook up a different deal, but I think this is also unlikely due to the stark views of each other by each company’s management
- With Stratasys’ higher valuation and 3D Systems’ lower valuation, they might be able to put together a proposal to acquire 3D Systems
- They could acquire a smaller company in the space, as they’ve done before, to grow their valuation in anticipation of another round of large-scale merger discussions
- And finally, they could do nothing
My guess is that they’d pursue other smaller companies and gradually build up their portfolio of products and services. That would enhance their value, as it has done with prior acquisitions. Bigger is better in the case of mergers and acquisitions, so that would put Stratasys into a better position for future negotiations with 3D Systems or other suitors.
3D Systems announced that they will add a 60 day period for Stratasys to “go shopping” for alternatives on their original offer. The offer itself doesn’t seem to have changed, however, and it seems that Stratasys would have to countersign the agreement before the October 5th expiry date. I don’t see any reason why Stratasys would want to sign, as they can make a deal with 3D Systems at any point in the future. It’s not like 3D Systems would refuse a deal.
Finally, what of Desktop Metal, which was abandoned at the last minute?
They will be paid the break-up fee specified in the merger agreement with Stratasys, which is positive for them, so they came out with something. They wrote:
“Desktop Metal remains focused on continued improvements in non-GAAP gross margins, operating expenses, adjusted EBITDA, and operating cash flow – en route to our stated goal of adjusted Q4 EBITDA profitability.”
This seems to say they’re going to continue as they have done, which might mean they don’t have an alternative plan at this point. We’ll have to watch to see what they do next.