Interest in 3-D printing, the process of manufacturing by printing successive layers of material on top of each other to create a finished product, has surged recently, with technology blogs, business journalists, news radio, and even Taco Bell commercials touting the industry as a transformative step forward. Accordingly, the stock price of the two largest 3-D print companies, 3D Systems (DDD 2.42%) and Stratasys (SSYS 0.50%), have soared, pushing valuations up to dizzying heights. What have the companies been doing with their high-flying stocks? So far, they've mostly been deploying them to rapidly consolidate their fragmented industry. News from the two big players this week shows they have no plans of slowing down.
Stratasys just completed its merger with the popular leader in desktop and personal 3-D printing, MakerBot, in August. On Tuesday, Stratasys announced that it will sell an additional 4 million shares with an option to sell 600,000 more to its underwriters, increasing the number of shares outstanding by more than 10%. The expected $400 million in new capital will be used to continue to pursue new acquisitions as well as to meet financial milestones associated with the MakerBot acquisition.
Let them decorate cake
Whatever acquisition target Stratasys had in mind, it won't be The Sugar Lab. 3D Systems, the oldest and largest developer and manufacturer of 3-D printers and print technology, announced Tuesday that it will acquire The Sugar Lab for an undisclosed amount. The husband-and-wife team behind The Sugar Lab took 3D Systems' Color Jet Printing technology and adapted it to work with a sugar and water solution, creating complex edible confections that can be used to top baked goods or simply admired as art.
While The Sugar Lab's products are beautiful, the company isn't likely to add much to 3D Systems. Unlike recent high-profile acquisitions such as the 3D Systems buyout of metals printer Phenix Systems, which owned around 50 patents related to printing with metals, The Sugar Lab has no intellectual property of its own, and indeed its platform was based on 3D Systems' intellectual property. I'd hazard that the undisclosed motivation for the acquisition may indeed have been as part of a settlement of a patent violation.
If The Sugar Lab adds appreciable value to 3D Systems, it would be largely through promotion and market-building, as the small company has received plenty of favorable press coverage and has worked with celebrity chefs such as Ace of Cakes star Duff Goldman. While printing with sugar is not a technically novel concept, creating 3-D printed foodstuffs will certainly spark the public imagination and drive continued interest in the technology.
At any rate, the acquisition won't put much of a dent in the $250 million in capital that 3D Systems raised through a new public offering back in May. 3D Systems stated at the time that the money raised would be used to fund acquisitions, and even after paying out around $20 million to acquire Phenix Systems, most of this cash is still ready to be deployed.
So who (and what) is next?
If Stratasys and 3D Systems have taught us anything, it's that no company is too big or too small to be bought up in their ongoing quest to consolidate the industry. The past year has seen everything from 3D Systems buying up what's almost literally a mom-and-pop shop to Stratasys completing a merger with Objet, an Israeli company that was at the time the third-largest 3D print company in the world. The only sure thing is that more acquisitions will follow, and soon.
So what does that mean for investors? Some analysts balk at the torrid pace of mergers and acquisitions, fretting that the parent companies will be unable to consolidate their operations successfully, that frequent public offerings dilute existing shareholder value, and that growth rates are kept artificially high by simply buying revenue through acquisition.
Certainly, this acquisition pace can't be kept up forever, but for now, I'm not worried: 3-D printing is still a relatively fragmented industry, and within that industry only 3D Systems and Stratasys are pure-play 3-D printers that have access to public capital markets. I think it's a smart move to take advantage of this access to capital to consolidate control over what is clearly a fast-growing industry. So far, the dramatic growth in free cash flow per share at these companies has easily outpaced the dilutive effects of new share offerings, and I believe today's frenzied pace of acquisitions is actually setting both companies up for longer-term success as they build up competitive moats by expanding their installed base of machines and acquiring more and more intellectual property.
