Ever since Hewlett-Packard (NYSE:HPQ) CEO Meg Whitman announced last month that HP would enter the 3-D printing market by mid-2014, there's been some wild speculation about buyouts. Investors need to be especially wary when this buzz involves very small companies such as tissue engineering, or "3-D bioprinting," company Organovo (NASDAQ:ONVO). Here's what you should know about the situation in general, and Organovo in particular, to help protect yourself from being caught up in the frenzy.
It doesn't take much to significantly move the stock prices of companies with small market caps and/or relatively low trading volume. And while that might sound great when the stock's heading up, things aren't so hunky-dory when the usually inevitable downturn comes. Small stocks that have turbocharged rises on no relevant news often have drops that are just as torrid, leaving many individual investors who bought on the way up with whiplash, in addition to a loss.
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While it's unlikely that HP would be interested in one of the smaller publicly traded industrial-focused 3-D printers, speculation involving those buyouts at least falls within the realm of possibilities, however remote. The buzz about Hewlett-Packard possibly being interested in buying Organovo, on the other hand, crosses the line into the Twilight Zone.
Granted, Organovo uses 3-D printing, or bioprinting, to "print" human tissues from cells. However, it's a biotechnology company. It's nothing like the other 3-D printing companies -- such as 3D Systems, Stratasys, and ExOne -- which make printers that have consumer, commercial, and/or industrial uses. Hewlett-Packard is involved in the consumer and business technology space, not in biotechnology or life sciences, and it has no expertise in these complex fields.
The financial considerations
I'd imagine HP's board of directors would be thrown into a tizzy if Whitman announced she wanted to make a bid for Organovo. Let's play this out:
Whitman: "We'll need to spend about $850 million, as the company's market cap is $684 million [it had been approaching $1 billion before its recent big drop], plus we'll need to offer about a 25% premium [according to one article I read]."
Board: "How much money can we expect this company to add to our revenue and earnings?"
Whitman: "Ummm … well … it generated $23,000 in revenue last quarter and $693,000 over the last year, and its operating cash flow was negative $11 million over the trailing-12-month period."
Board: "And who are its customers?"
Whitman: "Organovo doesn't have any yet. Its revenue came entirely from partnerships with pharmaceutical and other companies interested in giving its technology a trial run, so to speak. The first commercial products – liver tissue assays – are expected to come to market in late 2014."
Board: "So, we can't count on any specific amount of revenue, let alone earnings, right? And we'd likely have to sink money into this business for awhile?"
Whitman: "Right. But it's neat-o technology, and it could have huge potential down the road … maybe five or seven years."
Board: "Meg, we're a turnaround company, remember? We need to generate some solid revenue and earnings growth soon, or we'll all be out of these cushy jobs. Furthermore, we don't have any expertise in life sciences or biotechnology, and we'd have to spend huge sums of money trying to catch up to deep-pocketed companies that have lots of experience in these fields. If you want neat-o, go drop close to a billion dollars of your own money on a custom yacht or something."
Back to reality
Those of you following HP's turnaround story likely know that one of Whitman's initial goals was strengthening HP's balance sheet, and she's made solid progress on this front. Spending big money -- close to $1 billion is a sizable chunk, even for HP -- to buy a company that would not only add zilch to HP's bottom line, but would almost surely subtract from its bottom line for at least several years, would undo much of Whitman's recent work.
If HP does acquire a company to enter the 3-D printing space, it will likely be one that has the potential to positively contribute to HP's revenue and earnings relatively quickly.
In short, while there might be valid reasons to invest in Organovo, a buyout by Hewlett-Packard is not one of them.