The Donerail Group LP, a Los Angeles-based investment company that owns approximately 2.3% of the outstanding shares in Stratasys, has issued an open letter to the Stratasys Board of Directors. In the letter, Donerail discusses ‘serious concerns’ with the proposed acquisition of Desktop Metal by Stratasys.
The letter also highlights the recommendation from proxy advisory firm Institutional Shareholder Services (ISS) that Stratasys shareholders vote against the merger.
In the letter, Donerail says: “ISS questioned critical matters that, we believe, speak to the Board’s inability to act as fiduciaries and properly oversee Stratasys management.”
The letter also highlights a quote from the ISS report, where ISS detailed: “Such concern appears to be primarily about the role that particular SSYS management members would play following a [DDD merger], and less about formulating a path to create value for its shareholders in a transaction.”
Donerail said of this quote: “Given these comments from ISS, how are shareholders to ever trust this Board’s ability to oversee Stratasys management?”
Donerail says that since announcing its public concern regarding the Desktop Metal merger on June 29, it has worked to engage with shareholders, industry participants, and members of the Stratasys management team and Board to better understand the rationale for the proposed transaction.
The company says that as its diligence on the merger grew ‘more exhaustive’, Donerail only grew further concerned with the deal, and highlighted a ‘multitude’ of concerns directly to members of the Stratasys Board.
Donerail claims that the public nature of the events over the past four months have highlighted a disturbing fact pattern at the Board level, that warrants ‘immediate rectification’. The company says: “This Board has consciously, blatantly, and repeatedly failed shareholders, eschewing acquisition offers at 60+% premia while pursuing acquisitions that serve to both act as poison pills and also create questionable value for shareholders.”
The group also said in its letter: “Shareholders simply deserve better than what we have currently representing our interests. For these reasons we intend to vote AGAINST the proposed Desktop Metal acquisition.”
The full letter from The Donerail Group to the Stratasys Board is as follows:
The full text of Donerail’s letter to the Board follows:
To the members of the Board,
Since the May 25th announcement by Stratasys that it intended to acquire Desktop Metal, we have been highly outspoken of our skepticism regarding the strategic and financial merits of a Desktop Metal acquisition.
In conjunction with our skepticism regarding a DM acquisition, we have extensively detailed our concerns regarding historical actions undertaken by the Board. Notwithstanding the DM acquisition – a transaction that we intend to vote AGAINST given the multitude of clear value-creating options that do exist – our concern regarding the Board’s ability to be appropriate fiduciaries for shareholders has risen to alarming levels.
Yesterday, a leading proxy advisory firm, ISS, agreed with our assessment regarding a DM acquisition, publishing a report in which it explicitly recommended that “shareholders should vote against the proposed transaction with DM,” detailing that “it is not clear that [the proposed DM transaction] creates value for SSYS shareholders.” Other large shareholders have also publicly announced that they intend to vote AGAINST the proposed DM transaction.
But, perhaps, in what spotlights what we believe to be grave and fundamental issues, ISS questioned critical matters that, we believe, speak to the Board’s inability to act as fiduciaries and properly oversee Stratasys management.
In the part of its report in which ISS assesses the SSYS criticism of the competency of the 3D Systems Corporation (“DDD”) management team in the context of a DDD merger proposal, ISS detailed that “such concern appears to be primarily about the role that particular SSYS management members would play following a [DDD merger], and less about formulating a path to create value for its shareholders in a transaction.”
Given these comments from ISS, how are shareholders to ever trust this Board’s ability to oversee Stratasys management?
Indeed, since announcing our public concern regarding the Desktop Metal acquisition on June 29th, we have worked to engage with shareholders, industry participants, and members of the Stratasys management team and Board to better understand the rationale for the proposed DM transaction. Frankly, as our diligence on the DM acquisition grew more exhaustive, we only grew further concerned with the prospective merger, and we highlighted a multitude of our concerns directly to members of the Board.
Reflecting on the past two years of events, the Board’s indifference to shareholders has been consistent and costly:
- On July 19th, the Board unanimously rejected Nano Dimension Ltd.’s (“Nano”) Revised Partial Tender offer (the “Nano Partial Tender”), whereby Nano had offered to acquire up to 51% of the outstanding ordinary shares of Stratasys, including the approximately 14% of Stratasys’ outstanding ordinary shares already owned by Nano, for $25.00 in cash.
The Nano Partial Tender would have delivered SSYS shareholders approximately $10.75 in cash (86% of the closing price on September 19th) and, on the Board’s own estimates, between an additional $5.25 and $8.25 in equity value.2,3
Using the Company’s own estimates of what it believed to be fair value of the Nano Partial Tender, the Board unanimously rejected a 40% premium to yesterday’s closing price in favor of a DM transaction that ISS itself stated “is not clear that [a DM acquisition] creates value for SSYS shareholders”.
- On September 12th, the Board unanimously rejected a revised DDD proposal, stating that it did not constitute a “Superior Proposal” to the proposed DM acquisition, terminating discussions with DDD.4 We were surprised and disappointed with such a conclusion by the Board because, as we stated in a July 14th press release, the DDD unsolicited proposal was clearly superior to the DM deal that the Board had elected to pursue.
ISS appears to agree with us and stated in its report, “DDD’s alternative offer to acquire the company, by contrast, presents a more convincing route to value creation for SSYS shareholders.” Objectively, it is impossible to say that the DDD offer is not more attractive than pursuing a DM deal that is not clear if it creates value for SSYS shareholders.
While the DDD offer is comprised of a meaningful stock component, the value of DDD’s latest proposal can easily be assessed and compared to the standalone SSYS closing price of $12.48 per share on September 12th – the day that the Board rejected the DDD proposal and SSYS shareholders were left with only the DM deal or a stand-alone path as an alternative:5
- Value of the DDD Proposal Using a 30-Day VWAP for DDD equity: $16.93 (36% premium)
- Value of the DDD Proposal Using a 90-Day VWAP for DDD equity: $19.70 (58% premium)
- Value of the DDD Proposal Using a 180-Day VWAP for DDD equity: $20.55 (65% premium)
This proposal was unanimously rejected by the Board, and discussions with DDD were terminated.
- Notwithstanding the two most recent public offers made by Nano and DDD, as Stratasys itself disclosed in a June 20thregulatory 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.
Implied disclosed acquisition premia of the 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.
The public nature of the events over the past four months have highlighted a disturbing fact pattern at the Board level that warrants immediate rectification – this Board has consciously, blatantly, and repeatedly failed shareholders, eschewing acquisition offers at 60+% premia while pursuing acquisitions that serve to both act as poison pills and also create questionable and unclear value for shareholders.
Shareholders simply deserve better than what we have currently representing our interests.
For these reasons we intend to vote AGAINST the proposed Desktop Metal acquisition.
William Z. Wyatt
Managing Partner
The Donerail Group LP
ISS had also recommended that Desktop Metal shareholders vote "FOR" the Stratasys merger, saying: “Given the opportunity to become part of a larger entity, the potential cost synergies of the proposed combination, and the share form of consideration, which enables DM shareholders to participate in the upside of the combined company, support for the transaction is warranted.”
Read more:
A complete timeline of the Stratasys + Nano Dimension + Desktop Metal + 3D Systems story (so far)
Proxy advisor ISS recommends Desktop Metal shareholders vote “FOR” merger with Stratasys
TCT Interview – Stratasys CEO Yoav Zeif details the strategy behind Desktop Metal merger
Stratasys and Desktop Metal to merge in deal worth $1.8 billion
