In an effort to keep up with its brisk pace of acquisitions, 3D Systems (DDD -0.86%) announced on Tuesday after the market closed, a secondary share offering, which sent shares down more than 6% in after-hours trading. Although pricing has yet to be determined, 3D Systems will offer 5.95 million shares and potentially an additional 892,500 shares to underwriters within 30 days of the announcement. Assuming an offering price of $50 per share, 3D Systems is expected to raise between $297.5 million and $342.1 million in proceeds before underwriting fees. As of March 31, 3D Systems had $306.7 million in cash on its balance sheet and about $12.5 million in convertible debt. 3D Systems' management likely either has big plans for future acquisitions, or it believes that its stock is too richly valued and it's taking advantage of "cheap" currency. It's probably the former.
In the last three years, 3D Systems has completed more than 50 acquisitions in an effort to build out a more vertically integrated 3-D printing company, which management believes is the only way to have a meaningful impact in the 3-D printing space. Consequently, 3D Systems offers the most diverse 3-D printing technology portfolio in the industry, allowing it to target more applications than the competition, largely because different 3-D printing technologies are best suited for different applications. And because 3D Systems has been aggressively building out this multi-faceted approach over the last three years, the company thinks it has gained a first-mover advantage over the competition.
Last month, 3D Systems' largest competitor Stratasys announced the purchase of 3-D printing service provider Solid Concepts, a move signifying a greater emphasis on becoming more vertically integrated and broadening its manufacturing expertise. Arguably, if 3D Systems considers itself a few steps ahead of the competition in terms of total integration, it makes sense for the company to continue to build out and solidify this advantage. Raising funds through a secondary share offering is a convenient way for 3D Systems to improve its strategic options.
On dilution
Of course, the concern with secondary offerings is that it dilutes existing shareholders. As of May 23, 3D Systems had approximately 103.9 million common shares outstanding, and after the completion of this offering, existing shareholders will be diluted between 5.7% and 6.6%. In order for 3D Systems to mitigate the risk of dilution to existing shareholders, it will have to use the proceeds to make acquisitions that offset this dilution with ample earnings-per-share growth over the long term.
Historically, 3D Systems has demonstrated to investors it knows how to make acquisitions that help drive its organic revenue growth rate higher, and previous share offerings haven't had a long-term impact to its stock price. In May 2013, 3D Systems offered 7.5 million shares at a price of $40 per share, and shares have risen more than 30% since then.
Taking a long-term view
Although it never feels good when a secondary offering has a negative impact on 3D Systems' short-term share price, it's likely in the best interest of long-term investors. Upon completion of this offering, 3D Systems will have essentially doubled its cash position, giving the company plenty of capital to continue building out the most vertically integrated 3-D printing company in the entire industry. Going forward, 3D Systems investors should continue to expect a brisk pace of acquisitions – and have confidence that management is thinking in the best long-term interest of the business, not the short-term share price.
