How 3D Systems' Just-Announced Xerox Acquisition Exposed a Sleeping Giant


If you're following the 3-D printing space, you might have read the news that 3D Systems signed an agreement on Wednesday to acquire a portion of Xerox's solid-ink engineering and development teams and related assets for $32.5 million in cash.

While this seems like good news at face value for both companies, there's more beneath the surface, as Xerox might well turn out to be a sleeping giant in the 3-D printing sector. If you're an investor or potential investor in the 3-D printing space (or even in Xerox), here's what you should know.

3D Systems and Xerox: a 15-year partnership between the 3-D and 2-D printer kings
I'd imagine many investors had no idea that Xerox, the 2-D printing innovator which invented laser printing, had anything to do with 3-D printing. And for those that did, the extent of Xerox's involvement might come as a surprise.

Xerox has a top-notch pedigree in the 3-D printing space, as it's been collaborating with 3D Systems, the sector's biggest company, for a decade and a half. Most notably, this teaming has led to 3D Systems' best-selling ProJet line of printers.

There appears to be good synergy between these two companies, so this further strengthening of their partnership is a win-win situation, in my opinion.

This acquisition involves 3D Systems getting 100 Xerox engineers and contractors involved in product design and materials science, its own lab facility at Xerox's Wilsonville, Ore., campus, and select intellectual property. The company plans to make good use of its new resources, and boost its research and development spending by 75%-100%. 3D Systems has a solid balance sheet - $345.4 million in cash and just $18.9 million in debt at the end of the third quarter - so can comfortably afford this $32.5 million acquisition and increased R&D spending.

Xerox, of course, gets $32.5 million added to its coffers. While $32 million is hardly chump change, it's a relatively small amount of money for a company with $948 million in cash at the end of the last quarter (though it also had $7.5 billion in debt), which generated a levered free cash flow of $2.5 billion over the trailing-12-month period. The main benefit for Xerox is the tightening of its bond with the biggest 3-D printer manufacturer, which could lead to bigger and better things.

What could those things be? Quite possibly, a seat at the table when 3D Systems needs technology to 3-D print electronic circuitry.

Xerox: working on what would be the ultimate 3-D printing breakthrough
3-D printers can now spew out components made from plastics, metals, ceramics, sands, and many other materials. However, they haven't yet been able produce, at least as well as current methods, circuitry to make electronic items. This is a biggie in today's connected world, where computers and smartphones proliferate, and even commonplace products often contain embedded electronics.

Xerox's famed Palo Alto Research Center, or PARC, is working on unique technology to print electronic circuitry. None of this technology was part of the sale to 3D Systems, as appeared to be the case, as the companies' statements' included that Xerox would "maintain ink and print head development resources along with research relevant for digital printing and the 3D markets." To be certain, I verified this information by contacting Xerox.

Xerox's technology, dubbed "Xerographic micro-assembly," is based on laser printing technology, which Xerox invented in the 1970s. The process involves breaking down silicon wafers into tens of thousands of "chiplets," which are roughly the size of a grain of sand, bottling them to produce the "ink," and printing the circuitry onto a surface.

Magnified image of chiplets; Source: PARC via New York Times

The chiplets are precisely placed and oriented by using an array of electrodes to generate a microscopic electrical field. In addition to microprocessors and computer memory, these chiplets can be microelectromechanical systems, or MEMS, used to perform tasks such as actuating and sensing physical conditions such as pressure, heat, and temperature.

If you're thinking that there are already printing techniques being used to produce electronic circuits, you're right. However, PARC researchers have stated that none of the current commercialized methods can achieve the transistor density available through conventional chip manufacturing, according to a New York Times article. So these techniques, while having some useful applications, are limited.

Xerox's technology, which is receiving funding from DARPA - the U.S. Department of Defense's research arm - is reportedly several years away from being commercialized. However, if it turns out to be as promising as it sounds, it's certainly a possibility that some deep-pocketed company might pour some money into speeding things along.

Speaking of deep pockets, let's turn our attention to Google. Some of you might know that Google's Motorola unit recently teamed with 3D Systems for Project Ara. The goal of this project is to create a large-scale 3-D printing manufacturing platform capable of producing customizable open-source modular smartphones. Naturally, this mission entails integrating the 3-D printing of various types of materials into the platform - including conductive materials to produce electronic circuitry, a capability 3D Systems doesn't yet possess.

I'm not saying Xerox's tech could be used for Project Ara - as that might depend upon it getting up to speed sooner rather than later and it might not turn out to be the best tech for this specific application. I am, however, saying that Xerox's tech could prove to be very attractive to 3D Systems (and others) as 3-D printing transitions from a method to produce prototypes and small-run production batches to both large-scale manufacturing and "micro-manufacturing." Project Ara is an indication that this transitioning has begun in earnest.

The Foolish takeaway
3D Systems' acquisition of Xerox R&D talent and select IP should help the company further its leading position in the 3-D printing sector, which is projected to grow 20%-30% annually over the next five years.

As to Xerox, given its tightening bond with the leading 3-D printer manufacturer and its record of innovations - laser printing, photocopying, and the graphical user interface (popularized by Apple) - its progress in developing its chiplet technology certainly bears watching. If successful, this technology could not only be used in the 3-D printing of consumer electronics, but possibly in "The Internet of Things," where "smart" objects will be embedded with RFID tags and sensors.

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Fool contributor Beth McKenna has no position in any stocks mentioned. The Motley Fool recommends 3D Systems. The Motley Fool owns shares of 3D Systems and has the following options: short January 2014 $20 puts on 3D Systems. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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