• Applauds Leading Independent Proxy Advisory Firm, ISS, For Recommending Stratasys Shareholders vote AGAINST the Acquisition of Desktop Metal
  
• Commends Other Stratasys Shareholders for Public Statements Announcing Intent to Vote AGAINST the Acquisition of Desktop Metal
• Continues to Believe There to be Other Viable, Attractive Alternatives to Desktop Metal Acquisition
• Reiterates Strong Concerns Regarding the Stratasys Board’s Complete and Utter Disregard of Its Fiduciary Obligations and Contends Existing Stratasys Board May Need Severe Overhaul

The Donerail Group LP (together with its affiliates, “Donerail” or “we”), a large shareholder of Stratasys Ltd. (the “Company” or “Stratasys”) (NASDAQ: SSYS), today issued an open letter to Stratasys’ Board of Directors (the “Board”). In its letter, Donerail discusses its serious concerns with the proposed acquisition of Desktop Metal, Inc. (“Desktop Metal” or “DM”) by Stratasys and highlights the recommendation by leading proxy advisory firm Institutional Shareholder Services Inc. (“ISS”) that Stratasys shareholders vote AGAINST the proposed acquisition of Desktop Metal.¹  

The full text of Donerail’s letter to the Board follows: September 21, 2023

Stratasys Ltd.
1 Holtzman Street, Science Park
P.O. Box 2496
Rehovot, Israel 76124

To the members of the Board,

Since the May 25^th 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 29^th, 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 19^th, 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 19^th) 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 12^th, 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 14^th 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 12^th – 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 20^th 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.
  
  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

About Donerail

The Donerail Group LP is a Los Angeles-based investment adviser that employs a value-oriented investment lens focusing on special situations and event-driven investments.

Investor Contact:

This email address is being protected from spambots. You need JavaScript enabled to view it. 

¹ Stratasys Ltd. 20-September-2023. ISS Proxy Analysis and Benchmark Policy Voting Recommendations. Permission to use quotations from the ISS report was neither sought nor obtained.
² Assuming all Stratasys shareholders except Nano tendered their aggregate 58.9mm shares and a maximum of 25.3mm shares were purchased as per Nano’s tender offer (43% total shares tendered), 33.6mm shares would not have been purchased; Calculation based on blended value of shares tendered to Nano at $25 per share.
³ Stratasys Press Release. 19-Jul-2023. “Stratasys Board of Directors Unanimously Rejects Nano Dimension’s $25.00 Revised Partial Tender Offer.”
⁴ Stratasys Press Release. 12-September-2023. “Stratasys Board Unanimously Concludes Revised 3D Systems Proposal Does Not Constitute a ‘Superior Proposal’ and Terminates Discussions with 3D Systems.”
⁵ Historical share prices per Bloomberg.