The Donerail Group LP, an investment company that owns approximately 2.3% of the outstanding shares in Stratasys, has published a letter questioning the strategic and financial merits of the pending Desktop Metal merger.
Stratasys announced in May an agreement to merge with Desktop Metal, with shareholders of the former owning around 59% of the combined company and shareholders of the latter owning the other 41%. Since that deal was announced, 3D Systems has made public multiple offers to merge with Stratasys instead - a deal which the Donerail Group believes is 'reasonably likely to lead to a superior proposal.'
The Donerail Group states in its letter to Stratasys that several private meetings have been held with the Stratasys management team, but the most recent meeting held last week 'introduced a heightened level of concern regarding the Company’s governance and strategic direction.'
"Most specifically," the letter reads, "we have concerns regarding the Board’s clear, unconscionable, and continued refusal to engage with bona fide suitors regarding a sale of the Company over the past two years. Such fiduciary negligence needs to be rectified immediately."
Per a regulatory filing disclosed by Stratasys on June 20th, 2023, the company has knocked back 12 unsolicited acquisition proposals from at least three 'bona fide' acquirers since January 2021. The Donerail Group claims that Stratasys rejected 11 out of 12 proposals without engagement, while also suggesting that one proposal exceeded over 60% from the trading price at the time of the offer. "Such blind and inconceivable rejections have cost Stratasys shareholders dearly," the Donerail Group letter reads.
The letter goes onto state that Desktop Metal's March 2023 proposal to acquire Stratasys 'was the lowest of all other unsolicited offers' and 'subsequently ended not in a sale of SSYS, but rather, what has turned into a highly risky bet-the-company merger for Stratasys.' The Donerail Group also highlights that 'the deal has not been well-received by the investment community,' pointing out a significant price drop in Stratasys shares when the deal has announced. Its letter to Stratasys also outlines that the Donerail Group believes 3D Systems most recent offer - announced on June 27 - to be 'significantly more compelling' than current alternatives. The letter 'applauds' the Stratasys Board for confirming it will review this offer and encourages 'a swift review ahead of engaging directly' with 3D Systems.
Concluding, the letter reads: "After two years of rebuffing willing suitors, we implore the Board to be especially mindful of its fiduciary obligations to shareholders, rather than have an inflated view of an execution story wrought with challenges. The correct answer is clear in our view. We hope that no further action beyond this letter will be needed and fully expect the Board to be properly advised on how to proceed. We are standing by and open for communication at any time with the Board, management team, or any shareholder."
The Donerail Group's letter can be read in its entirety below:
Stratasys Ltd.
1 Holtzman Street
Science Park, P.O. Box 2496
Rehovot, Israel 76124
To the Board of Directors,
As you are aware, The Donerail Group LP (together with its affiliates, “Donerail”, or “we”) is a large shareholder of Stratasys Ltd. (the “Company”, “Stratasys”, or “SSYS”) with a beneficial ownership interest of approximately 2.3% of the Company's outstanding shares.
As you are also aware, since our meeting last week with the Stratasys CEO, Dr. Yoav Zeif, we have attempted on multiple occasions to call a private meeting with the members of the Board of Directors (the “Board”) responsible for strategic initiatives to highlight our views of value of the various strategic options. Our meeting requests have been categorically ignored, leading us to release this letter publicly.
To be sure, we have appreciated the meetings with members of the Stratasys management team in recent weeks, but we have found that our most recent meeting, alongside certain details disclosed recently in regulatory filings, have introduced a heightened level of concern regarding the Company’s governance and strategic direction.
Most specifically, we have concerns regarding the Board’s clear, unconscionable, and continued refusal to engage with bona fide suitors regarding a sale of the Company over the past two years. Such fiduciary negligence needs to be rectified immediately.
As the Company disclosed in a June 20th regulatory filing, since January of 2021, Stratasys has been on the receiving end of at least 12 unsolicited acquisition proposals from at least 3 separate bona fide acquirers. We also believe that the Board would receive additional acquisition interest if it would indicate a willingness to seriously entertain it. Implied acquisition premiums of the disclosed 12 unsolicited acquisition proposals have been attractive, with one proposal exceeding over 60% from the trading price at the time of the offer. In 11 of those 12 unsolicited acquisition proposals, Stratasys rejected the unsolicited proposal without engagement. Such blind and inconceivable rejections have cost Stratasys shareholders dearly.
In the one unsolicited acquisition offer that was made of which the Board did, in fact, engage upon – the March 2023 Desktop Metal Incorporated (“Desktop Metal”) proposal – the premium offered was the lowest of all other unsolicited offers and subsequently ended not in a sale of SSYS, but rather, what has turned into a highly risky bet-the-company merger for Stratasys.
To say the least, the Desktop Metal deal has not been well-received by the investment community. Stratasys shares dropped 10% immediately upon the news1, and the investment analyst community immediately came out criticizing the transaction due to the fact that “SSYS would be absorbing an unprofitable business (DM) that has dramatically missed nearly all of its financial forecasts” and explicitly highlighting disbelief regarding the 2024-26 financial forecasts2.
In our June 21st meeting with Dr. Zeif, we asked pointed questions regarding the historic desire of SSYS to rebuff willing bidders at objectively attractive prices, and Dr. Zeif confirmed to us that notwithstanding historic actions, the Board was now “working for shareholders”, that he “understood our views”, and that the Board would “do the right thing” for shareholders.
Tuesday morning, we watched with great interest as two separate, attractive, unsolicited offers were presented to Stratasys shareholders – one of which objectively serves as a highly attractive alternative for SSYS shareholders to the Desktop Metal proposed transaction. In fact, we believed that the prior 3D Systems Corporation’s (“3D Systems") offer – and their likely ability to increase their bid – was sufficiently compelling to warrant engagement with them vis-à-vis the Desktop Metal proposed transaction’s value offered and precisely the valuation work that we had endeavored to highlight to the Board in a meeting – a request that was, again, rejected. As it stands today, 3D Systems’ revised, increased proposal offers SSYS shareholders a combination with a highly complementary strategic party in a cash and stock deal valuing Stratasys at an over 27% premium to Monday’s closing trading price. We do not believe that the Board can reject the obvious any longer: a 3D Systems transaction is significantly more compelling than the current alternatives and warrants immediate engagement.
We applaud the Board for its immediate commitment to review the revised merger proposal from 3D Systems, as it announced Tuesday, and we encourage a swift review ahead of engaging directly with 3D Systems to optimize its offer to Stratasys shareholders.
Critically, as we discussed at length with Dr. Zeif on June 21st, the Board was wise to include language in its Desktop Metal merger agreement that allows the Board to engage with an unsolicited suitor in the event that a proposal is made that is “reasonably likely to lead to” a superior offer. 3D Systems’ renewed proposal clearly marks such a proposal, and we would encourage the Board to act in its capacity as fiduciaries to negotiate and announce a transaction.
In this instance, we encourage the Board to follow its commitment to “work for shareholders” and terminate the Desktop Metal deal in favor of a more attractive deal.
After 2 years of rebuffing willing suitors, we implore the Board to be especially mindful of its fiduciary obligations to shareholders, rather than have an inflated view of an execution story wrought with challenges. The correct answer is clear in our view.
We hope that no further action beyond this letter will be needed and fully expect the Board to be properly advised on how to proceed. We are standing by and open for communication at any time with the Board, management team, or any shareholder.
William Z. Wyatt
Managing Partner
The Donerail Group LP
Stratasys' largest single shareholder has also been making moves to disrupt the planned merger with Desktop Metal, making several attempts to turn its 14% of shares into 50+% - most recently through a tender offer of 20.05 per outstanding share. Nano Dimension acquired 12% of Stratasys' shares last year, and though initially playing down the idea of increasing that investment, has sought to gain control over the company in recent months.
