Whichever way you look at it, General Electric is paying a lot to acquire a pair of European leaders in "additive manufacturing machines" (3D printers to you and me). In total, it's offering $1.4 billion for Germany's SLM Solutions and Sweden's Arcam, a punchy 10 times their combined revenues. The premium on the previous day's close is respectively 53 percent and 37 percent.
Even before GE pounced, neither target looked a steal. SLM was valued at more than 70 times estimated 2016 earnings, Arcam almost 120 times. So has the U.S. industrial conglomerate lost its 3D printed marbles?
Probably not. While SLM revenues almost doubled last year, it sold less than 100 machines and made 2 million euros ($2.2 million) of net profit. Applying traditional deal metrics to a still maturing industry isn't very telling. Right now, growth is what matters and as additive manufacturing moves beyond simple prototyping to mass production, GE sees plenty of that, providing it has the right technology to sell. In truth, this looks another uncomfortable example of Europe selling up some of its most promising high-tech industrial companies.
Arcam and SLM machines are used to make things like aerospace and orthopedic parts from metal powder. GE's already a big user of their machines so it knows the potential better than most -- it thinks 3D printers will help cuts its production costs by up to $5 billion within 10 years. It also sees $1 billion in sales from additive manufacturing by 2020; and with its global sales force behind tiny SLM and Arcam that's not impossible.
Importantly, these acquisitions target arguably the most attractive niche in 3D printing: metal-based additive manufacturing, rather than plastics or composites. Many 3D printing stocks reached eye-watering values a couple of years ago, but that was due partly to the assumption that we'd all start printing personalized goods in our garages.
Investors had a hard time differentiating between the various technologies and where there was a genuine industrial use. Some poorly chosen acquisitions didn't help. The chart below shows the recent performance of some of these companies. For most, it's not pretty.
Metal-based manufacturing represents less than 10 percent of the 5 billion euro global additive manufacturing market, according to Credit Suisse. However, making high-value industrial parts could ultimately prove most lucrative. Even though competition is increasing, the technical barriers to entry in sectors such as aerospace look higher than for simple prototyping machines.
Of course, there are challenges. Building up parts layer by layer takes time, and the machines generally aren't all that big. So the technology isn't always practical for large parts or things that are needed quickly. Arcam directors acknowledged that they had limited resources to fund the investments as the technology evolves.
Clearly, they didn't have full confidence that Europe's capital markets would have the patience to fund that growth. That should give European industrialists and policymakers pause for thought as they ponder the continent's industrial future.
GE promises to keep local headquarters and management teams and jobs, so arguably not much has changed. Even so, the intellectual property, profit and productivity gains will now accrue to a non-European group. It's hardly the first time. This year German robot maker Kuka was taken over by China's Midea, while British chip designer ARM was snapped up by Japan's Softbank.
Taken together, these deals suggest Europe's aspiration to drive the digital-industrial revolution sits on weaker foundations. In fairness, Europe still retains some capable 3D printing companies, notably Germany's Eos and Concept Laser. It better hope they prove a match for GE's ambitions.
This column does not necessarily reflect the opinion of Bloomberg LP and its owners.
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