Something strange is stirring at Stratasys (SSYS -1.11%) -- and it's coming to a boil.

Roughly three months ago, its smaller competitor in the field of 3D printing, Nano Dimension (NNDM -1.99%), made an offer to acquire the roughly 86% of Stratasys' shares that it did not already own, at $18 per share. Two weeks later, Stratasys' board of directors rejected this offer, prompting Nano to raise its bid -- first to $19.55 per share, then a week later to $20.05.

These offers were also rejected, so Nano launched a hostile takeover bid, presenting Stratasys' shareholders with the original offer of $18, hoping enough shares were tendered to give Nano a 53% controlling stake.        

This end-run around Stratasys' board prompted it to change its strategy as well. On May 25, the company announced that instead of selling itself to Nano, either in whole or in part, it intended to make an acquisition of its own.

In a $1.8 billion all-stock transaction that valued its own shares at only $15.26, Stratasys proposed to acquire Desktop Metal (DM -1.27%), another maker of 3D printers. Stratasys would give 0.123 shares of its own stock for each outstanding share of Desktop Metal, thereby absorbing its rival.

Another dimension

As if all the above weren't already complicated enough, last week a fourth maker of 3D printers decided to get in the mix. Offering what it termed a "superior proposal" to any of the plans already floated, 3D Systems (DDD -1.15%) -- roughly the same size as Stratasys, so twice the size of either Desktop Metal or Nano -- suggested that Stratasys should merge with it to create what it called a leading pure-play 3D printing company "with unmatched scale and highly attractive financial profile."  

3D Systems noted that its offer -- $7.50 in cash and 1.2507 shares of its stock for each share of Stratasys -- was worth about $19 per share in total, more than the $18 offered in Nano's hostile takeover, and much more than the $15.26 in Stratasys' offer to buy Desktop Metal.

3D's offer was apparently better enough than everything else on the table right now, that it helped to drive Stratasys shares 11% higher when it was announced on Friday, while lifting 3D Systems as well.

Crunching the numbers

What has investors so excited about all the merger & acquisition offers surrounding Stratasys? And should they be excited at all?

Well, consider that when reporting earnings in May, Stratasys said it was on track to do $1 billion in sales in 2026, more than a 50% increase from the $650 million or so in sales it expects to do this year.

If Stratasys acquires Desktop Metal, however, it thinks it can hit that goal even faster. Management forecast $1.1 billion in sales by 2025 when announcing its deal, and that makes sense, since Desktop Metal would bring about $200 million in annual sales.

Stratasys management further argued that combining with Desktop Metal would help cut $50 million in annual costs, and grow revenue by $50 million more through synergies between the two companies. And that would enable the company to earn positive adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by 2025.

But 3D Systems says Stratasys could do even better than that. 3D predicted that by combining with it rather than with Desktop Metal, Stratasys investors could look forward to:

  • Combined sales of $1.3 billion by 2024 ($100 million more than the Desktop Metal merger, and one year sooner).
  • $100 million in cost savings on that revenue.
  • $121 million in positive free cash flow (FCF) from the combined company in 2024 -- more than twice the real cash profit either of these companies has generated in a single year, according to data from S&P Global Market Intelligence.

What it means for investors

3D's argument seems a whole lot more sound than Stratasys'. Consider that Stratasys' promise to grow revenue 50% in three years all on its own never seemed particularly realistic. For one thing, most analysts who follow the company are forecasting only about 10% sales growth over the next couple of years. For another, Stratasys' sales actually declined in each of the last two quarters.

Absorbing Desktop Metal, as Stratasys management still intends, would help the company toward its goal by giving Stratasys a quick one-time $200 million bump in revenue. And Desktop Metal is expected to grow its sales faster than Stratasys over the next couple of years. Just going off analyst projections, therefore, a Stratasys-Desktop Metal merger does look likely to achieve the companies' $1.1 billion target by 2025.

But by merging Stratasys with 3D Systems, the combined companies would be doing nearly $1.2 billion already today, and potentially $1.4 billion by 2025. And if 3D's predictions that the two combined companies could grow revenue at 21% annually over the next five to seven years are correct, it's not unforeseeable that by 2030, this new 3D printing giant could be doing $3.6 billion or more in sales annually.

When you also consider that 3D is promising these sales will be profitable, generating a FCF margin of perhaps 9% or better, this implies FCF could more than triple in the five years post-merger.

From where I sit, this sounds like the better deal for Stratasys shareholders -- and for 3D Systems shareholders as well.