Investors have been hyped since the announcement of the proposed merger of Stratasys (SSYS) and private Objet back in April. The deal promised to create a market leader in the surging 3D printing market.
Stratasys engages in the development, manufacture, marketing, and servicing of three-dimensional (3D) printers, rapid prototyping (RP) systems, and related consumable materials for office-based RP and direct digital manufacturing (DDM) markets.
While the effectiveness of the merged company remains a question, no doubts should exist that the stock has been a homerun since the deal was announced in April. By mid-August, Stratasys had nearly doubled.
Stock Limps Into Approval
After the close on Friday, the company announced the shareholder approval of the merger. With this hurdle out of the way, the transaction should be finalized in a couple of weeks.
Unfortunately though, the stock limped into the close on Friday finishing at $64.36 after trading as high as $66.70 on the day. The stock also finished just below the 20ema of $64.37, suggesting more downside could exist.
Back in August, our article warned investors that many risks existed with buying the stock at $66.65. The stock has only spent a couple of days at higher prices as the jump to $72.50 quickly reversed.
A prime example of an unexpected risk was the removal from the S&P SmallCap 600 index announced last week. The stock is being removed from the index after the close on September 18 due to the merged company not meeting the domicile criteria for inclusion in S&P US indices.
Whether the removal from the index leads to further stock weakness will be seen this week. Investors buying the stock need to be prepared for more competitors joining the sector, especially from Asia or via leading printing companies such as Hewlett-Packard Co. (HPQ) or Lexmark International, Inc. (LXK). Neither might be legitimate threats, but investors still should be prepared for such risks that could hit the stock.
Objet Merger Reviewed
Objet is a leading manufacturer and rapid prototyping company based in Israel. The merger of equals will help provide scope and leadership to this advancing industry.
The combined company will be a powerhouse in 3D printing and direct manufacturing with pro-forma revenues announced back in June of $277M in 2011 and $83M for Q1 2012. That 2011 total was significantly higher than what previously bigger competitor 3D Systems (DDD) reported at $230M. The quarterly number is also higher.
More significantly, the Q1 non-GAAP earnings would be $0.32 for the combined company compared to $0.28. The question remains whether the going forward numbers will see a comparable accretive number.
While the company further highlighted the accretive nature of the deal on the Q2 earnings call, it was actually very sparse on details, even going so far as to mention that financial details of Objet would be provided within a couple quarters of closing. Though not too alarming, it seemed strange that after providing Q1 pro-forma numbers that the company would be so quiet on Q2 numbers and even guidance.
Stratasys shareholders will own 55% of the diluted shares of roughly 40M. The combined value is around $2.5B with Stratasys trading over $64 at the close on Friday. This exceeds the 3D Systems market value of roughly $2.2B, making Stratasys the independent market leader.
The stock remains questionable at these levels after a massive gain since the October lows about a year ago. Though the merger creates a market leader, it also faces integration risks especially with the previous companies having virtually equal ownership. Not to mention the difference in cultures between Minnesota and Israel could play an important role in whether the company functions smoothly going forward.
Investors excited about the sector need to remember that the stock fell from $55 to below $20 in just five months prior to the huge run this year. Now that the stock is limping into the merger finalization date, investors might finally be focusing on the potential risks ahead. Another similar drop is very unlikely, but an extended drop to $50 might not be out of the question.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
Additional disclosure: Please consult your financial advisor before making any investment decisions.