Two of the world's three largest 3-D printing companies, Stratasys and Objet, have completed their merger, and today the combined entity began trading as Stratasys (SSYS +1.85%). The new company is valued at about $3 billion, inculding $277 in revenue in 2011. That eclipses the former industry leader, 3D Systems (DDD +4.67%), which weighs in at a $2.4 billion market cap and 2011 sales of $230 million.
The young industry, which centers on the rapid production of models and parts by printing successive layers of material into a three-dimensional object, is now dominated by these two large companies. The new Stratasys now boasts the widest range of print materials, with its products able to manufacture objects out of more than 120 different materials. 3D Systems, however, maintains the broadest portfolio of 3-D printers.
The merged company will keep Objet's headquarters in Rehovot, Israel, which is expected to save $3 million to $4 million in taxes annually. For Stratasys, which realized $21 million in 2011 net income, this change of headquarters is significant but not game-changing. The company also expects to generate $7 million to $8 million in annual net cost savings by mid-2014.
The biggest opportunity created is the potential for the new company to cross-sell products into the additional sales channels the merger provided. While initially customers will continue to do business with either Objet or Stratasys representatives, eventually sales will be streamlined into a single point of contact, giving customers easy access to the full range of Stratasys products, services, and solutions.
Stratasys and Objet initially expected to complete the merger in the third quarter of 2012 but had to delay after the U.S. Committee on Foreign Investment expressed concern that the deal could present national security concerns. These worries were successfully addressed, and the committee gave final approval to the plan only last week.
While the new company kept the Stratasys name, the leadership team tilts decidedly toward Objet. Stratasys CEO and co-founder Scott Crump will give up the CEO role and instead will preside over the board of directors as a full-time executive chairman. Objet CEO David Reis will take the reins as CEO of the new Stratasys. Erez Simha was both the chief operations officer and chief financial officer at Objet and will continue to occupy both positions at the merged company. Elchanon Jaglom will transition from being the chairman of the board at Objet to chairman of the executive committee.
Under the terms of the deal, which was technically structured as a merger of Stratasys, with a subsidiary of Objet, former Stratasys shareholders control 55% of the company, with Objet shareholders controlling the remaining 45%.
The merger creates new opportunities as well as new risks. On the plus side, the joint entity will now have a more streamlined and efficient marketing and sales team, an important factor for an industry that struggles with customer awareness and appreciation of the technology. The new company will also be able to afford a higher research and development spending, equally important for an emerging technology.
On the other hand, the new management team will be overseeing the integration of more than 1,000 employees, most of whom are largely unknown to the Objet-focused executive board, split between headquarters in Israel and Minnesota, and attempting to keep customers satisfied during the transition. A rough acquisition could distract management, alienate customers, or simply fail to produce the cost synergies expected. One sign to watch for in an acquisition gone wrong is a company that issues several consecutive quarters of "one-time" charges related to restructuring.
Stratasys can be sure that 3D Systems will be waiting to pounce on any weakness. Its rival will be keen to regain its position as top dog in the 3D print industry, and 3D Systems' strategy of pursuing a larger number of small tuck-in acquisitions leaves it less liable to suffer from a bad integration. This also leaves 3D Systems more flexible to pursue new opportunities.
Both companies, however, are likely to benefit from industry consolidation. The largest revenue driver for each company is print services, essentially leasing out 3-D printers to create prototypes and models on-demand, giving customers access to 3-D print solutions without the need to invest in printers. While popular, this business produces lower margins than selling printers or print materials, principally because of a more competitive landscape. When the Big Two of 3-D printing splash out on acquisitions, it limits the number of print service providers operating and helps to enforce price discipline.
That short-term boost, along with the dramatic long-term potential of this innovative technology, may make Monday's news an excellent time to buy into the industry. With only two major operators now, it's very easy to hedge your bets and buy both, but investors may want a closer look at the oldest 3-D print company in the industry, 3D Systems.
