The ExOne Company (XONE) – Merger Arbitrage – 9% Upside

Current Price: $23.48

Offer Price: $25.5

Upside: 9%

Expected Close: Q4 2021

Press release


This is a consolidation transaction in the growing U.S. 3D printing industry. Desktop Metal, a 3D printer manufacturer ($2bn market cap), has signed a definitive agreement to acquire The ExOne Company, its smaller peer. Consideration includes a fixed cash portion of $8.5/share and a stock portion, which will amount to $17/share as long as DM’s share price (20-day VWAP 3 days before closing) remains between $7.94/share and $9.7/share. The deal is expected to close in Q4 2021, subject to XONE’s shareholder approval and regulatory consent. XONE’s long-serving chair/largest shareholder (19% stake) supports the merger, other shareholders are likely to follow suit. Regulatory consents shouldn’t be a problem as this is a relatively small $575m deal. DM is an active consolidator in the industry having made 8 acquisitions since 2019 - merger with ExOne appears to fit the pattern and is highly synergistic.

Cheap DM borrow for hedging is available on IB. If the DM VWAP is below or above the $7.94/share and $9.7/share range, the stock consideration will be fixed at 2.1416 or 1.7522 rate respectively. Thus, dynamic hedging may be required.

Notable risks include potential volatility in DM’s stock. 3D printing market experienced a major surge at the beginning of this year following a series of positive industry events (including a broad earnings recovery) as evidenced in ARK 3D printing ETF gains. The stock prices across the industry have declined a bit since Feb’21 highs and have been moving sideways for several months now. However, Q3 results are expected in November and if the merger does not get closed till then, the result announcement could make an impact on DM’s price and in turn merger consideration.

As is the case with many other 3D printing-related companies, ExOne has yet to produce a profit. On an EV/TTM revenues basis, the deal comes at a multiple of 6.62x versus a 2-6x TTM multiple for XONE's peers. The offer also comes at a premium to historical EV/Revenue multiples of the company as well. E2021 performance is expected to be much higher (the transaction implies a market cap./expected 2021 revenues ratio of 5.5x.). Overall, the offer looks quite generous and XONE shareholders could be fine with cashing out at this price, especially considering the increasing competitive pressure from a range of larger peers, such as 3D Systems and Stratasys.

Aside from the largest shareholder/chair S. Kent Rockwell (owns 19%), who supports the merger, other major shareholders include ARK Investment Management (owns 12%), Nikko Asset Management (7.6%), and Sumitomo Mitsui Trust Holdings (7.6%).


3D printing industry and Desktop Metals

The global 3D printing market grew by 21% in 2020 versus 2019 as limited access to traditional manufacturing during COVID and improved technological advancements helped accelerate the growing industry even more. The 3D printing market was valued at around $13 billion in 2020 and is expected to grow at a CAGR of 21% between 2021 and 2028, as the technology’s adoption increases. It is reported that 47% of engineering businesses already use 3D printing for prototyping while 29% use 3D printing technology for aesthetic or functional use. The industry is consolidating - 3D Systems and Stratasys acquired ~60 companies between 2001 and 2015, and a notable uptick in M&A activity continues to be seen today.

Desktop Metals went public via a SPAC deal in 2020 with an emphasized intention to focus on M&A strategy. CEO quote:

The industry is highly fragmented today. [...] We want to be a consolidator in this industry. That’s our plan of record and we plan to execute that.

They have been delivering this promise with these recent acquisitions (from 2020 annual and 2021 Q2 reports):

  • Mar’19 - acquired addLEAP AB (Swedish 3D printer R&D company) for $0.4m;
  • Jul’19 - acquired Make Composites (composite printer R&D company) for $5.4m;
  • Oct’20 - acquired Forust Corporation (3D printing R&D company) for $2.5m;
  • Dec’20 - acquired Figur Machine Tools (3D printing R&D company) for $3.5m;
  • Feb’21 - acquired EnvisionTEC (3D printing company) for ~$300m;
  • May’21 - acquired Adaptive 3D Holdings (polymer resin supplier) for $61.8m;
  • Jun’21 - acquired Aerosint SA (a pioneer in multi-material recoating systems for 3D printing) for $17.7m;
  • Jun’21 - acquired Beacon Bio (3D printing R&D company) for $17.7m.

ExOne seems to be the largest, yet still highly synergistic acquisition as recently explained in the earnings call. The transaction will double the IP portfolio to over 650 patents and will add 23 qualified materials to DM’s library, now approaching 250 materials (plus additional 50+ materials under R&D across the combined companies). Expected synergies include cross-selling opportunities in addition to cost savings:

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