Lidar makers Ouster and Velodyne complete their merger, creating a sector powerhouse

Lidar makers Ouster and Velodyne said on Monday they have successfully completed a “merger of equals,” creating a lidar powerhouse.

The combined company will have more than 850 current customers, a deep portfolio of patents and about $315 million in cash on hand, based on year-end figures. That cash is critical in a market where it has become much more difficult for not-yet-profitable companies to raise much-needed funds.

It will retain the Ouster name and will continue to trade under that company’s ticker symbol, “OUST.” Shares of Ouster were down 15% in early afternoon trading following the news, as investors digested the dilution that will result from the all-stock deal. Velodyne shareholders voted to approve the deal on Friday.

Lidar, short for “light detection and ranging,” is a sensor technology that uses infrared lasers to create a detailed 3-D map of the sensor’s surroundings. Lidar units are used in a variety of robotics applications. Of particular interest to investors, lidar sensors are considered important components of nearly all of the autonomous-driving systems currently under development.  

Investors’ interest in the potential of self-driving vehicles led many lidar startups to go public over the last few years. But valuations have fallen sharply in the last year as investor enthusiasm cooled, and as some automakers reduced spending on self-driving programs in favor of more limited driver-assist technology.

Those developments helped set the stage for consolidation in the lidar space, Ouster CEO Angus Pacala said when the deal was first announced.

Pacala, who will lead the combined company, told CNBC in an interview on Monday that the merger is “a major step toward profitability for Ouster.”

Ouster’s products have posted positive gross margins for a while, meaning that they sell for more than it costs to make them. Pacala noted that after recent changes to Velodyne’s contract-manufacturing arrangements, that company’s gross margins turned positive as well.

“This is huge for the merger and for the strength of the combined business,” Pacala said. “Not only are we increasing the revenue base of the two companies by merging, but it’s all positive margin.”

In November, when the merger was first announced, the companies said that they expected annual savings of about $75 million that could be realized within the first nine months after the transaction closed. Pacala said he now expects the total savings to be somewhat higher – but, he noted, that will come at a cost: The merged company will cut between 100 and 200 jobs, he said, mostly in operational roles where the two companies have significant overlap.

Ouster will have about 350 employees once the two companies are integrated, Pacala said.

Some of that integration has already taken place in the executive suite. Velodyne’s CEO, Ted Tewksbury, will chair the combined company’s board of directors, and its CFO, Mark Weinswig, will retain that role with Ouster, while Ouster co-founder Mark Frichtl will serve as the combined company’s chief technology officer.

But Pacala said the combined company has no plans to combine manufacturing.

“Velodyne manufacturers with Fabrinet in Thailand, about an hour and a half from the Benchmark manufacturing facility that Ouster has been using,” he said. “We intend to continue to work with both partners.”

Ouster said that it will provide a “comprehensive update” on its integration plans during its fourth-quarter earnings presentation on March 23. But investors can expect good news: In a preview of its earnings report, Ouster said it met its full-year 2022 revenue and gross margin guidance. Velodyne exceeded its fourth-quarter billings and revenue targets, Ouster said.

Velodyne shareholders can expect to receive 0.8204 shares of Ouster stock for each Velodyne share they held, representing a premium of about 7.8% based on the respective companies’ share prices when the deal was first announced in November.