Dueling Mergers: The 3D Printing Battle Rages

Includes: DDD, SSYS
by: Kyan Alexander

Both 3D Systems (DDD) and Stratasys (SSYS) have recently announced some significant mergers (for background on both companies please read a previous article of mine located here). These mergers continue to display the heated and aggressive race that is the 3D printing market. This new technology has huge implications for all industries from manufacturing to medical devices, and even for home users. I think we will continue to see 3D and Stratasys continue to battle it out, but for now, let's take a look at what the mergers are estimated to bring.

Stratasys is merging with Objet. Objet is an Israeli company that was in the process of going public but abandoned that to merge with Stratasys. According to the slides from the webcast discussing the merger, Objet is only slightly smaller than Stratasys. The company will continue to trade as SSYS with an estimated market cap of $1.4 billion. Objet's revenues for fiscal 2011 were $121.1 million for 37.8% year over year growth. Its gross profit margin is 61.2% and it enjoys a low Israeli tax of 9.8%. Objet's revenues grew about 5% more than Stratasys and Objet's gross margin is almost 10% higher. They both have strong balance sheets with a good chunk of cash and no debt on the books. The deal is reported to be an all stock deal leaving Stratasys owners owning 55% of the new entity.

The merger brings complementary products and customers under one name. It doubles the product offerings in concept modeling and rapid prototyping. Objet brings nearly 500 patents and its proprietary PolyJet technology, which is boasted to be the only 3D multi-material printing technology. The deal should close in the third quarter of 2012. After closing it will take approximately 12 months to realize all the synergies from the deal. The companies are expecting revenue synergies because of the cross-selling opportunities, $7-$8 million in cost savings, and $3-$4 million in tax savings. Merger related costs were only defined as "significant" on the call and will be better detailed on the earnings call May 9th.

I don't see any reason the merger between these two companies would be banned. I am concerned about the merger costs and how "significant" they may be. I also want to see how many shares the deal involves and how that will dilute EPS. The new Stratasys could post revenues of $330 million for the year (about 20% growth). I also hope it can learn and take advantage of Objet's higher margins and low tax rate. Without seeing the actual numbers, I think Stratasys shares should be at least $50/share by the end of this year and look forward to the May call for better info to make predictions on.

3D has gone out and made two of its own acquisitions. First up was My Robot Nation. This company will help boost cubify.com and the at home cube printer by adding hundreds of new designs to cubify. This helps 3D continue to be the first and really only of the companies focusing on the at home market for these devices. The second company I am more excited about; Paramount Industries. While details about exact integration and price haven't been discussed (which is concerning and I'm hoping for details on the conference call next week on April 26th) this company helps bolster offerings in a previously lacking area. Paramount is big in the manufacturing area, especially in aerospace and medical devices. It also maintains AS9100C and ISO 9001:2008 certifications according to the press release and Paramount's website. I was concerned 3D was placing too much focus on the cube and home use and was going to get beat-up by Stratasys in the commercial arena. This acquisition helps keep 3D a serious player and threat. Based on systems and offerings available on Paramount's website, I would have to say it is at least the same size as Objet. But again, I'll be anxiously listening to the call next week to get more details on exactly what Paramount will bring to 3D.

I like both of these companies and like the race between them even more. I still think 3D has the slight advantage because of size and it is already working on developing the at home market. While it's not a big segment now, when the cost of the devices comes down, it will already have a robust library of products for printing. They are both excellent growth stories in a growth field, and right now I think they're both fit for investors. Be careful buying here because of the merger inflation, but don't wait to get too close to earnings because I expect prices to increase based on speculation and after earnings when both companies report good numbers and better guidance.

Disclosure: I am long DDD.