Start of M&A Journey
I started my current role in the first week of the breakout of COVID. It was the perfect time, and it was the perfect storm. But because of this crisis, we also had an opportunity to turn it into an opportunity. We took the first two weeks and the first two and half months to manage the company in quarantine, from a small room.
We said we were not selling because people stopped printing immediately because we are living from the consumer buzz. People stopped printing, and we leveraged this time and the capacity that people had to run. It was an amazing process of reframing our strategy.
We have run a diagnostic, which was one of the work streams. Then, we build a strategy. Then, we construct a new operating model that will support the strategy and will resize the company in order to make sure that we are shifting resources into new things that we need, like M&As.
We did all that in two and a half months internally, with our internal resources, with people that are within the company for years and know the industry inside out. Part of it was because we need to acquire companies. Everything starts with a ‘why’.
Stratasys is one of the two pioneers of this industry, and it’s a 30-year-old company, and in 2012, it was a merger of two companies. Stratasys is an American company. We are sitting in Minnesota now. And Object was an Israeli company. And this merger created the new Stratasys, which was the indisputable leader in the industry.
But unfortunately, from the peak of 2013 to 2014, which was the hype of 3D printing, we started declining for six years until 2020. This decline was not really explained, and that’s what we’ve done in our strategic process.
We found out that we were declining because we were not competing in the growing markets and with the growing technology. We were addressing only one-third or the overall opportunity because we are focusing on two technologies.
But we are not playing with the other three technologies that are very common in polymers. And that’s when we asked ourselves, and this is the number one question in our strategy, where do I compete?
We found out that we need to compete on Polymer 3D printing, focusing on manufacturing, But practically, we don’t have the tools to computerize. We don’t have the tools because we are missing three technologies.
And what happened in those five years prior to 2020 is that other companies with other technologies were growing where we were declining. So, it was clear that we needed to be there. And in order to be there, the fastest way to address those fast-growing markets was to acquire technologies, and that’s what we have done.
The nice thing is that Stratasys is a great company. When we run the diagnostics, and this is how you identify the problem, what do you solve here for? We found out that when we are analyzing the deals that we closed and the deals that we lost in those declining years, it appears that we have a fantastic conversion rate.
Almost every deal, almost 95% of the deals that we are bidding on, we are winning and at the same time we're declining. Competition was growing, but they were not growing because they were winning our bids. They were winning because they were playing in markets where we do not exist.
That was the obvious insight. We have to uncover the overall addressable market, not only the two technologies. And the nice thing in additive manufacturing is that there is no silver bullet. So it's not like the car industry, you can go from Eden Prairie and go to Minneapolis, the MSP airport with any car, with a GM, Toyota, Mercedes, and with the Audi. Each one of them will take you there.
In 3D printing, this is not the case. If you want to print a mic or you want to print a cell phone, or you want to print a part for a car, you need a different technology. And if you don't have the right technology, practically, you're not competing. That's the ‘why’.
Strategic M&A framework
We had a strategy, and then we determined that in order to execute the strategy, we needed to carry out a set of actions. So, we crafted a very detailed plan on how to execute this strategy step by step. The strategy had three phases.
One of those work streams was focused on business development activities. We built a framework and presented it to the board more than two years ago, just a few months after introducing the strategy. We offered our board this business development and M&A framework and stated that it was a strategy tool to execute our plan.
The major element is business development and M&A activities. This is our proposal. We will bring numerous opportunities to the board for approval, but we promised one thing - everything will be within the framework.
That's what we have done, and that's why we initiated the search for targets. Because once you have a strategy and a framework, everything becomes much easier. You're not acting opportunistically. Instead, you have a plan and you want to fill holes or to accelerate some of the initiatives or projects in your plan.
It's a compelling framework. Again, it's about what you do in M&A and why you do it. We built it as a three by three table, derived from the strategy. I won't detail all the nine boxes, only three of them, as it would be too complex.
Generally, we asked ourselves what we needed to do to fulfill our strategy, which is polymer manufacturing. Our objective is to lead the industry into real manufacturing with 3D printing in polymers. That's our strategy—simple and direct, polymer manufacturing.
To be there, you need core technologies, which are the machines. You also need materials and software to support the machine since it's a trade-off between materials and printers to achieve the best part. Additionally, you need a full workflow.
What does a full workflow look like? For example, we are printing one application—anatomic modeling and surgical guides for surgeons. Before you head into the operating room for a complex surgery, you print the anatomic model.
For example, a separation of conjoined twins in Israel. We printed many different models of the head where the twins were connected, along with surgical guides. The surgeons were practicing using these models before the operations.
But in order to get there, there is a full workflow. You need to scan the organ, translate it into a 3D printing file, one that you can print. This process is known as segmentation, and it requires interaction with the surgeon or doctor. Then, you send it for printing, and the surgeon will decide on surgical guides, where to drill or cut.
After practicing on the model, they proceed to the operating room. It's a whole workflow, so you need to make sure that there is the software, the ability to interact and transform the file, someone to print it, send it back, and have quality control. That's the workflow.
We are now Stratasys. We've established a strategy to aim for polymer manufacturing and truly transform this industry from a prototyping one into a manufacturing industry. And we focus on polymers.
So, we asked ourselves, what do we need? We need core technologies, which is a combination of internal capabilities, because we already have two technologies, and class technologies that we will acquire. So that's the first layer.
The second layer is about add-on technologies. This involves investing in add-on technologies, materials, and software to strengthen their core technology while reinforcing the company's position.
For example, if I'm printing with a specific jetting technology, I need some visual recognition. However, I don't want to produce or develop it internally, but I could invest in a company that possesses these capabilities, allowing me to adopt the add-on feature into my core technology.
The first layer consists of the core technology, the second layer involves investment in add-on features, software, and material.
Then, the third layer is all about partnerships. Instead of acquiring or investing in all needed areas, Stratasys also seeks to establish partnerships that can assist in building the full workflow.
So those are the three layers. And if I want to achieve my strategy, I need a combination across these three layers. That's the only way to have a fully utilized use case across different applications without losing focus and without pouring too many resources into it. That was the framework. Two and a half years ago, we laid down the framework and began populating it with targets, and the rest is history.
So again, we have a strategy to move towards polymer manufacturing. To get there, you require five technologies, which make you agnostic when you're dealing with a customer. You need these five technologies because, as I've mentioned, there's no single solution that fits all. That's one aspect.
You need hardware, which is the technology. But you also require software, material, and unique added value features that aren't part of the core technology. These are features you add to the technology to ensure you can deliver the best parts and the highest quality print. That's the second layer.
The third component is building a full workflow. What does a full workflow look like? If I need to construct a part for a helicopter or an airplane, I need to ensure that I have a whole thread from pre-processing to post-processing. Everything must be traceable, and I must be able to capture the data. That's what I need.
So how do I fulfill this? We decided that for the technologies, we would fully acquire them. For material, software, and add-on technologies, like visual recognition and quality control, we would invest with the option to acquire in the future. The third layer would consist only of partnerships, with some level of investment to establish an end-to-end flow.
Real-life acquisition scenario
Let's break down the framework layer by layer. First, we identified that we were missing three crucial technologies in polymers. One is Direct Light Processing (DLP), the second one is Stereolithography, and the third, most suited for mass production, is High-Speed Sintering in a powder bed. We won't delve into the details as this is an M&A discussion, but we were missing these three technologies. So, we set out to identify good targets and pursued them. And that's what we did.
We acquired three companies. These companies were in their early stages, having developed very unique, IP-protected technologies for those three areas. In practice, this almost tripled our addressable market as a company. What we did was acquire them at their early stages, develop them into real products, and introduce these products into our channels, leveraging our existing infrastructure.
So, while we are buying technology, we already have the global infrastructure and coverage to ensure its success.
Evolution of Strategy
The fact that we developed a strategy three years ago doesn't mean that we stopped. It's still evolving. We developed a strategy, but we also developed a process on how to assess the relevance of the strategy and the need to adjust it year over year. We put in place a five-year plan that we adjust every September, one month before we start the annual budget. This is crucial for the success of both the overall and M&A strategy because things change.
Three main things influence this evolution. One, market changes (macro changes and industry changes). For example, certain technologies can advance faster than others. We need to shift resources from one technology to another, especially when there's more market traction. So you want to make sure that you are shifting resources into something that is more promising and we generate more return.
The second factor involves assessing your progress and adjusting your strategy based on your yearly lessons. Lastly, feedback from customers and partners is vital. These three elements usually push changes in the strategy. The market is changing, and maybe you are running after a goal that is not anymore relevant. It happens a lot, especially in industries like us where developing a machine or a solution takes years.
So every year you need to check yourself. We do it twice a year if the market doesn't move to another place. That's number one.
The second part requires maintaining two feedback loops. The first is internal: did we meet our target? If not, why? What have we learned? What should we adopt that worked well in one place and didn’t work in another?
The second feedback loop involves our customers and partners. They are the end-users of our product, and their feedback is essential. It could be that you completed it already, and then your customers come back to you and they need something else. And that's what we have done. We took those three as part of the five-year plan and we changed.
A great example of our change is shifting our strategy from primarily focusing on technology, which we initially lacked, to concentrating on use cases. This shift happened after a year as we added technology and progressed. Our overarching strategy, our North Star, remains the same: we want to be in product manufacturing with polymers.
The north star has not changed. However, the approach has evolved. Initially, the goal was to develop new printers. Then, upon hearing from our customers that while the printers were great, they needed a full workflow tailored to their application. So, our focus has shifted not only to provide the best machines but also to deliver the right solutions. This shift embodies the evolution of our strategy while staying true to our north star.
Working with the corporate development team
Corporate development plays a critical role in our operation. When I joined, we put together a very strong team of corporate development with very clear goals, adopting a divide and conquer strategy. Some members focused on seeking core technologies, some on material, software, and add-on technologies, and others on partnerships.
Practically, we divided the work amongst two to three groups. Although our team is small, consisting of just six to seven people, each member had a very clear goal. Some were focused on full acquisitions, others on venturing or investments - the second layer, and some on partnerships. I personally remain involved in the process.
At the beginning of each week, we hold a one-hour corporate development update, but we don’t start anything if it’s not part of our strategic framework. We always prioritize. That’s why having these weekly meetings, because there are many opportunities out there, and if you don't prioritize, you risk losing sight of your objectives and failing to close deals. Because if you run after everything, there’s no way you will be successful.
All the time, we are prioritizing both in terms of the opportunities, but also if we agreed on on an opportunity, we also prioritize in terms of what are the issues we need to address? Because every acquisition or investment or partnership has some issues. And the ability to identify the make-or-break, or the ones that move the needle, is critical in M&A.
Corporate development teams pitching deals
Historically, I’ve done many M&As even before I joined Stratasys, I was always looking at three things, but it has evolved since I joined Stratasys. The first question was always about real need. When you acquire something with the intent to generate profit, you must verify that there is a genuine demand for the investment or acquisition.
The solution you provide should offer value that currently no else can deliver. They really need to appreciate this value, that is a must. Then, you ask, is there real technology here? Is there a technology that is unique? And last but not least, who are the people? Because people are everything in M&A.
That was my preconception upon joining Stratasys. I always checked those three boxes, but as the leader of the company, I made some adjustments.
The first question that I now ask, and want my business development team to ask, is whether the potential acquisition, investment, or partnership aligns with our strategy. Does it accelerate and enhance our strategy? Otherwise, it's easy to lose sight of our goals.
The second one, remember manufacturing is the strategy. Don’t do anything that doesn't take me to manufacturing. If you do it, it means we are not following the strategy and misusing resources, which are not taking us to our North Star. In the strategy, you also have to check the need, if there’s a value, and the value proposition and everything.
The second thing is the people. Can we work together with those people? Because the type of M&A we are doing involves acquiring businesses, not just assets or IP, and businesses are all about the people. There are two crucial aspects there: one, can I work with them? If we cannot, then it won’t work.
The next one is, can I structure the deal in a way to ensure these talented individuals have the right incentives? Because if they don’t have the right incentives, you will fail.
The third element is post-merger integration, or the execution of the deal. From day zero, it is so critical to envision the execution and integration process. If we don't manage this with discipline and focus on capturing synergies, the deal could fail.
Lastly, be honest with yourself from the beginning. You and your team must acknowledge potential issues before signing any deal. How will you turn this into a profitable business? Because sometimes, you fall in love with a deal and you are not addressing its issues. Knowing these issues in advance, prioritizing them, and having a plan is important. It doesn't mean that you will always be successful, but at least you are honest with yourself. This is the framework I emphasize to my business development team.
How to ensure positive business outcomes during integration
I'm a big believer in processes and systems. If asked a question and I don't immediately have a content-based answer, I can always speak about the process. Processes are vital here. So, you need a dedicated team. From day one of my tenure at the company, I established a transformation office. This transformation office has led the strategy reframing project and all acquisitions, investments, and organizational changes that we've implemented over the last three and a half years.
When we identify an opportunity, we construct a plan for it. We create a plan for due diligence, post-merger integration, and for the time between signing and closing the deal. We hold regular meetings and know precisely who is responsible for each work stream. We fully understand the issues at hand and we address them.
Having a structured system to support M&A from initiation to the end of integration is crucial. One of the beneficial outcomes of our approach is that we have conducted many such processes. As a result, we've built the necessary skills in formulating work plans and structures to ensure our success.
Big lessons learned
I had the good fortune of having M&A experience before joining Stratasys, which proved beneficial. We did not hire consultants at all. Now, don't get me wrong, consultants are great. Having been one myself, I could hardly say otherwise.
Consultants can be invaluable for specific tasks. When you need additional brain power, lack internal capacity, or are under a time crunch, consultants can deliver immense value. However, if you have a clear strategy and M&A activities are recurring, rather than a one-off event, then internal skills become essential.
That's what we did. We built a fantastic team equipped to propel us forward, handling everything ourselves. We have six investments that also need management, and our internal team is proficient in handling them. Having an internal team that can run strategies is a huge advantage because they understand the industry.
We have also developed the analytical capabilities typically found in consultants. This includes decision-making based on data, process development, and analysis. But as you said, it's a process that is built brick by brick, leading to a well-functioning business development and transformation office team.
We had many lessons learned, but I would focus on three. People are everything. The biggest successes, surprises, and satisfaction will come from people, but also the largest disappointments and issues.
This is part of leadership. It's a blend of truly seeing people and having the right empathy, because usually acquisitions and M&A involve a lot of emotions. Regardless of whether you're the acquirer, usually when someone acquires you and you're a founder, it's about more than just money. There are a lot of emotions involved, and you need to have the empathy to understand what is important for the other side. You have to be there. You need this level of empathy and understanding of what is truly important for the other side.
In many cases, it's not about the money. Once you've understood that, you need to put the right incentives in place. So it's a combination of empathy, clear management in terms of setting the right incentives, and also the legal part of it is important. You need to create a level of protection for your shareholders because you're taking on risk, and part of that risk is the ability to be successful with the people who are part of the acquired organization.
People are the first priority. You need to see the people, understand the teams, comprehend their concerns, and know their aspirations. Truly embrace them, as they are joining your culture.
We learned from our mistakes and leveraged the time between the due diligence and closing periods. Due diligence allows us to learn a lot, but usually, the exposure is limited to most of the people in the acquired organization because you do it with a select group. Then between signing and closing, you have an opportunity to learn about the organization as much as you can, meet more people, and plan the integration. This is not a simple task; it's a project that requires planning and dedication. This is part of our playbook which allows us to scale.
We participated in a process with a banker and insisted on giving more attention to the people part of the deal. It was also important to the other side.
People want to be identified with success and a company with a good culture. We are building a great culture within Stratasys because we see our people and we also see the people on the other side of the deal. I believe this is a major factor in being able to close deals.
The second lesson is every day, every week, every deal, prioritize. You cannot touch all the due diligence issues, but you need to make sure you are prioritizing and touching the most important ones.
We use a lot of problem solving as a team to tell which ones are important and not. We mainly do a lot of meetings with folks. You have to take the time to think.
The third lesson is that in every deal, you have to think about the worst case scenario. It will always be more difficult than you expect.
We don’t usually run a formal exercise. We just run scenarios of what can go wrong and try to address it in advance because you acquire technology, you run 10,000 different checks, benchmarks, and print parts. When you think that you have covered everything, there will always be a surprise. So, you have to keep in mind in advance what could go wrong. It'll be more difficult, but you’ll have the tools and resources and you're ready when something will not go as planned, because that is always the case.
And it’s okay. Even if it’ll go wrong, it’s not the end of the world. It’s just another obstacle that you need to overcome.
Retaining key people
If it's a key person in technology, someone we can't have a product without, we ensure that this person doesn't see the rewards of the deal unless they deliver. We usually build this with milestones.
In any situation where you need the talent, founders or individuals to stay in certain positions, you have to align the incentives. Relying on goodwill alone is not sufficient when you have responsibility to your shareholders. Business comes with risk, otherwise you can analyze forever.
I'd like to share a sentence with the audience or other CEOs, especially those leading public companies. M&A is a tool to achieve your strategy, not a goal in itself. You need to find those moves that will accelerate your strategy. Any M&A activity you undertake should align with your strategy. You have to be able to leverage your core strengths.
If you're acquiring technology, make sure you have the channels for it. If you're acquiring a channel, ensure you have the technology to put through this channel.
Rule number one, don't pursue an M&A simply because there's an opportunity. Undertake an M&A only if it aligns with your strategy, if it accelerates your strategy, if it brings you closer to your North Star.
The second rule is to conduct the M&A in a way that leverages your strengths. If you have channels, buy technology; if you have technology, buy channels. You must ensure there are synergies, otherwise it won't work.
Lastly, and equally importantly, people determine the success of your M&A activity. The way you treat people will significantly influence the outcome.
I spend time doing M&A in average. It was a unique situation here for the last three years because we did six investments and six acquisitions, but I wouldn't say on average between 15% to 20%.
I still spend a lot of time dealing with the rest of the business operationally because we have a great business development team.
In terms of how I get involved and developing relationships with the other CEOs, I do that myself. However, I believe those relationships are not strictly driven by M&A activity. If you are in an industry, you need to have relationships with other industry players regardless. It’s not part of an M&A activity.
You need to know your industry. All friends, no enemies. In 3D printing, it’s true. We are all friends because we are such a small industry, and the opportunity is huge. We want everybody to be successful because everyone that penetrates manufacturing increases and enlarges the cake for all of us.