Race For 3D Printing Capacity Could Revive M&A
By Harry Brumpton with analytics by Elizabeth LimReprinted from
It’s an industrial breakthrough destined to transform manufacturing, from the production of entire space shuttle rockets right down to dental implants. It’s only a matter of time before the technology will make it to homes too, experts say, giving you access to on-demand, customizable basketball shoes, toys, housewares and more.
3D printing builds solid objects of almost any design by zapping out tiny melded layers of plastic, metal or whatever else, much like a drip in freezing weather incrementally forms an icicle. This simplifies the complex assembly of heavy objects and intricate designs, in essence reinventing the traditional economics of production.
One darling stock of the 3D printing world is 3D Systems, which has posted a whopping return since the start of the new year of 27.54%. But its three-year record is even more eye popping:
3D Systems’ close peer Stratasys has endured an equally long rout, dropping 83.75% since January 2014. Likewise for close comparables ExOne, down 83.86% over the same period, and Germany’s Voxeljet, which is down 91.8%.
For long-term investors who bought into the message that 3D printing was a technological change equivalent in magnitude to the Internet, the rebound, however sharp, is a minor salve for a prolonged slump.
All these stocks ran well ahead of fundamentals because of the prospect that this still-deeply industrial process could soon tap consumer markets. The idea was that 3D printers were destined to become a basic home durable like a microwave or a clothes dryer.
The field was probably also helped to popularity by the fact that unlike blander breakthroughs in, say, chemical engineering, 3D printing is conceptually straightforward, not to mention visually exciting–little layers on top of other little layers? Why, it’s just like Lego for big kids!
As a result, just before the segment started its skid, 3D Systems traded at more than 113 times its 2013 earnings per share.
Along with the hype came consolidation. 3D Systems made seven acquisitions in 2014 alone, according to the Mergermarket database.
There were nine US-based 3D printing deals last year, still far less than the 15 done during the peak of the cycle in 2014, but an encouraging step.
Over the history of the space, a little more than 80% of 3D printing deals have been done by 3D Systems and Stratasys, said Bryan Dow, Managing Director at tech-focused investment bank Mooreland Partners.
“If you take 80 percent of the acquisitions off the market, you’ve got a really small pool of buyers out there.”
But this year, there are signs deal-making is waking up from its slumber. On January 31, 3D announced its first acquisition in nearly two years with the takeover of Dutch maker of 3D dental printing materials Vertex-Global for an undisclosed sum.
What’s more, as these buyers work to rebuild, reposition and regain their past highs, new players have been jumping into the segment, and many of these former 3D rollup companies might make sense as targets for larger diversified conglomerates.
In the middle of last month, German trade magazine Der Aktionaer wrote that General Electric was pondering a takeover of 3D Systems. 3D Systems’ shares promptly rocketed more than 16% in a day. The report did not cite sources, but it would certainly fit a pattern for GE, which had already spent roughly $700 million for Sweden’s Arcam in October – a deal that markets at the time saw as a renewed endorsement: Voxeljet soared 7.26%, 3D Systems shot up 6.57% in two days, ExOne jumped 3.05% and Stratasys increased 1.7%.
GE, in fact, had bigger plans, but was forced to drop a $733 million bid it had planned to make at the same time for SLM Solutions after activist hedge fund Elliot Management amassed enough shares to scupper the takeover. In the fallout of the foiled deal, GE turned right around and bought a majority stake in close peer Concept Laser.
“It was a spectacular move, a little unexpected and it’s put every other player on their heels,” says Dow. ”I think they just put everyone in play, especially the big guys.”
But there’s also cause for caution.
3D printing is a term that gets tossed around without much distinction, Dow notes.
“The purists call it additive manufacturing. What is 3D printing? It’s just a buzzword.”
Worthwhile targets are scarce and firms don’t fit any one mold.
For instance, GE is hunting mainly for systems like those developed by Arcam, SLM and Concept Laser and private German outfit EOS e-manufacturing Solutions that combine computerized design technology with lasers that melt powdered metals into precision bits for its aviation division. This stuff is poles apart from additive printing businesses concerned with the “maker-bot” desktop box models such as 3D Systems, Stratasys and ExOne that can cast cute patterns for jewelry, artistic figurines and other assorted tidbits.
In addition to this—or perhaps because of it—the other headwind to M&A could be a preference by large industrials for R&D.
In September 2015, for instance, analysts at Jefferies said PC and printer giant HP was looking for an acquisition or partnership as part of plans to enter 3D, according to the Mergermarket database.
But more recent reports indicate HP has already built rather than bought its way into the space and is avoiding the consumer market altogether in favor of the more-profitable industrial manufacturer market. Even at the lowest end, its models carry a price tag of $130,000.
Arconic, the engineering spin-out from metals giant Alcoa, also seems to be on the path of internal innovation instead of acquisition. Last July, before the spin, Alcoa opened a 3D printing metal powder production facility that was part of a $60 million investment going back three years that builds on the company’s 3D printing capabilities in a bunch of its US facilities.
A range of tech companies, from engineering firms to metals miners and 2D printer makers, including BHP Billiton, BaoSteel, Ricoh, Microsoft, Cannon, Polaroid, TRUMPF and Sandvik, now have some sort of presence in 3D printing. But it’s hard to see most of these efforts as anything more than dabbling: research programs, partnership, small stakes in producers and minor product ventures.
In all, listed 3D printer makers need to be validated by vast quality improvements before they find an addressable mass market. In the meantime, unless these companies have applications aimed squarely at the heavy manufacturing world, they will remain of little interest to the sizeable strategic players capable of taking them out.
And as for printed basketball shoes?
Perhaps the sweeping social change this technology has been promising won’t all come in one decisive revolution, but, more like this promising manufacturing process itself, accrue bit by tiny bit.
Harry Brumpton (email@example.com) is a reporter for Mergermarket and Dealreporter, where he covers industrial companies out of New York. Elizabeth Lim is a Research Editor at Mergermarket in New York.
Bryan joined Mooreland in 2013, and is a senior member of the Industrial Technology and Electronics team with an emphasis on clean energy, 3D printing, lighting and efficiency, energy storage and alternative transportation, emerging environmental technologies, and capital equipment.