I will preface this post by saying it is (as always) just my opinion and based on my analysis of these events – it is not an official stance of LEO Lane or anyone else.
The quarter that just ended was record breaking in terms of public funding for Additive Manufacturing (AM) companies and may have far reaching implication for the entire ecosystem – those that raised funds and those that didn’t (yet?). In addition, M&A activity is also booming but that doesn’t mean that all this funding raised will go to good use – whether it’s good or bad mostly depends on the acquirer’s strategy.
The Push to Go Public
In general, we’ve recently seen a slew of SPACs (Special Purpose Acquisition Corporations), it is clearly the in-vogue method to go public. SPACs are public companies that IPO raising a sum of money and then look for an operational company to merge with in order to effectively invest that money. For the merged operating company this is a way to become public that is faster and some say simpler than a full on IPO (which the SPAC already took care of). SPACs have been around for more than 20 years but in the ’90s and ’00s they typically had a smaller amount raised and it also seemed like they were sometimes used as the last resort for raising money for growth companies that were not attractive enough to raise private money or IPO on their own. So, what has changed? Mostly the scale: the purses that SPACs raise and the valuations at which they merge as well as the quantity of SPACs has exploded. In the first quarter of 2021, SPACs have raised more than this method raised in all of 2020 – itself was an explosive SPAC year (jumping more than 500% YoY compared with 2019 – see below).
Raising larger amounts may seem a technical thing (and some may say a bad thing) but I believe in some cases it can make a big difference. Why? Because a large purse allows the SPAC management in conjunction with the merged operating company management to execute a roll up. Private Equity firms have done roll ups for decades, especially in highly fragmented markets, many (but not all!) with excellent returns. Well… our additive manufacturing ecosystem is very fragmented and therefore ripe for roll ups, which, if cleverly done, can bring a lot of value and actually justify high valuations. In general, acquisitions are dangerous (most fail) and so roll ups can seem even more dangerous but the flip side is that you don’t need every small acquisition to succeed in order for the roll up to succeed – so long as you stick to smaller acquisitions. The problem is with the well known banker adage: it takes almost the same amount of work to buy a large company as it does a small one.
Publicly traded AM companies, especially printer manufacturers but also software companies like Materialise, are popular with investors. By my count, in 1Q21, at least 5 AM companies used (or announced they will use) SPACs to become public in the US (and there may be more – certainly there are more in international markets). This includes Rocket Lab which is not exactly an AM company but rather an AM customer, and Redwire who defined their industry as Space & Additive Manufacturing. In addition, Nano Dimension has used its lofty public market valuation (enterprise value of $1.3Bn net of cash) to raise $1.5Bn in the Nasdaq public market over the last 6 months. For a company with 2020 revenues below $5mm this is very impressive. Its stock did fall over 20% in March – but that’s the great thing about cash, it doesn’t fall with the stock… Nano Dimensions’s CEO practically acknowledged earlier this quarter that he expects AM company prices to go down but believes that they can use this cash stash to make advantageous acquisitions once valuations are more to their liking.
The trick in common to all these companies is to be strategic and have a clear plan for the acquisitions or roll up: are you going for a distribution network? are you going for an end to end product offering? are you going for widening target customer industries? etc. Some people are busy speculating about like-buying-like acquisition targets (3Dprint.com offered some), but in my opinion the smart money should go elsewhere. At the stage AM is at the moment, putting together a stellar end to end product offering would likely have the best chances of succeeding and thriving – to whit, the flourishing and proliferation of turnkey solutions and the demand from customers to simplify their decisions and the number of solutions they need to choose and integrate to get their complete solution. Each one of these cash-rich public players knows their market well – if they look deeper and wider (using a platform view) they can likely see a winning roll up strategy worthy of their now deep pockets.
One thing is for sure, the remainder of 2021 promises to be a very interesting and eventful year in the Additive Manufacturing industry – it’s sure to be exciting!
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