Wednesday, June 19th, Stratasys (SSYS) and privately-held MakerBot announced an agreement for MakerBot to receive 4.76 million of newly issued SSYS shares (valued at $403 million on the day's $84.60 closing price). This represents 15.4% of the SSYS share float (or 12.3% of the total outstanding shares issued). Additionally, MakerBot owners will be entitled to up to an additional 2.38 million SSYS shares under a performance based earn-out provision through the end of 2014. This represents another $201 million compensation based on the June 19 closing price. This earn-out payment may be paid at Stratasys's discretion either in stock or cash based on the value of the SSYS shares at the time of the earn-out.
In a sign of investor confidence in the deal, Stratasys (SSYS) shares rose $2.40, or 2.8 percent, to $87 in after-hours trading.
Analysts expect the merger to be slightly dilutive on 2013 earnings per share and accretive by the close of 2014.
The merger is both accretive and synergistic. Stratasys has been focused on the enterprise market. It is a leader in this niche with machines that sell for $10,000 to $600,000, mostly through resellers. It also leads in 3D printing materials and supplies, including its Fused Deposition Modeling (FDM) and inkjet-based PolyJet technologies. It has an installed base of about 31,000 3D printers worldwide.
MakerBot is the leader in desktop 3D printing. Its machines are consumer and developer oriented, priced in the $2,000 to $3,000 range. They are sold primarily through the direct to consumer channel on the company's website, overseas through third party distributors and from the world's first ever retail 3D printer store in New York City. Over 22,000 of these units have been sold since 2009, 11,000 of those within just the past 9 months. Additionally, MakerBot owns and operates the Thingiverse.com website where it shares over 90,000 user-generated 3D product generating files, attracting over 1 million monthly downloads from over 500,000 unique users.
Stratasys is still in the process of consolidating its recent December 2012 acquisition of Objet. MakerBot will operate as a separate subsidiary and continue to retain its name, brand and management. The two entities will synergistically share product technologies, distribution networks and research, development and manufacturing facilities so as to leverage the technologies and intellectual properties of both. Planning and development will also be coordinated to maximize the cross pollination of experience and expertise that both companies bring to the unified corporate table. This approach should minimize the task of consolidating the merged company operations while fast tracking the advantages of the symbiosis.
The 3D printing industry total revenues from product sales and services have grown at a historic rate of 26.4% averaged over the entire 24 year life of the industry. 2011 growth was estimated to be 29.4%. 2012 growth continued at 28.6% over 2011. Sales are forecast to rise from 2012, $2.2 billion to $3.7 billion by 2015 and $6.5 billion by 2019. Both Stratasys and MakerBot are growing at a faster pace. Stratasys revenues for the 1st quarter of 2013 more than doubled, from $45 million in 2012 to $97.2 million in 2013. MakerBot saw total revenues soar from a total of $15.7 million for all of 2012 to reach $11.5 million for just the first quarter of 2013.
2012 global sales of 3D printers totaled an estimated 35,000 to 40,000 units. Sales for 2013 are expected to double.
Wolhers Associates' 2013 survey of the 3D printer market reports that 28% of total industry sales is related to parts for final products rather than models, prototypes, patterns and other such types of parts. This reveals the importance of the value of the installed base of printers and the reliance on suppliers of those materials and technologies along with their distribution channels. The individual and combined strengths of Stratasys and MakerBot make them a dominate source in this major revenue segment. Synergies and cross fertilization of products and technologies from the 2 companies will be multiple this strength.
Conclusions and Observations:
- After-hours trading saw share prices advance strongly for SSYS. This is a strong vote of confidence from investors in the nature, structure, and value of the announced deal.
- Although the acquisition represents 15.4% expansion of SSYS shares (and possibly 7% to 10% more on top of that if shares are used for payout of the earn-out contingent performance) the rapid growth and synergies of the industry and the combined company will overwhelm even these large numbers by the close of 2014 when the consolidation and earn-out bonuses are expected to be completely worked in. Total growth forecast leaves the 15% to 25% increase in shares within the margin of error of the overall industry and enterprise growth forecast itself.
- With market cap more than doubling and share price up over 25% since the start of the year, the use of the premium priced shares is an excellent deployment of Stratasys resources to capture MakerBot.
SSYS data by YCharts
This deal solidifies the position of Stratasys as one of the leaders in the field for the next 5 years and beyond. This is a time frame that demands consolidation and growth of market share to survive the transition from technology introduction to mainstream sector. Achieving critical mass in momentum and market penetration is critical to competitive survivability. The analogy to the introduction of AT&T (T) system competition and rise of MCI and Sprint (S) with the concurrent breakup of AT&T into the baby Bells is suggested for this phase of the 3D industry transition.
- Investors in 3D technology and this industry segment cannot afford to be left behind without a position in SSYS shares. The 3D printing industry remains in its very early stages and there are no value plays. Speculation, risk management through holding a diverse portfolio of key players and emergent technologies are essential to anyone committed to profiting from this emerging sector for the long term.
- Two factors stand out that are reasons for caution beyond the speculative nature of this emerging sector in general-
- Free Cash Flow and cash from operations have remained extraordinarily flat throughout the history of SSYS. Cash from operations remains stuck at only $22.5 million annually and free cash flow is a steady negative bleed of $7 million annually.
- Operating margins have plunged in the most recent quarter from historically around 16% to a current -2.5%.
Together, these two factors raise questions regarding the company's ability to effectively consolidate its recent acquisitions and translate them to the bottom line. The negative cash flow and operating margins must be reversed soon if the company will not be forced to take on considerable more debt or dilution by expanded share offerings. This is especially true in light of the coming abatement of the Fed's Quantitative Easing program and the likely uptick in interest rates to come.
SSYS Free Cash Flow data by YCharts
I am not a licensed securities dealer or advisor. The views here are solely my own and should not be considered or used for investment advice. As always, individuals should determine the suitability for their own situation and perform their own due diligence before making any investment.