Stratasys, an Eden Prairie company whose machines make quick product prototypes, said Monday it is merging with Israeli company Objet Ltd.

The combined company, to be called Stratasys Ltd., would be 55 percent owned by present Stratasys shareholders, who would get one share of the new company's stock for each Stratasys share they now own under the all-stock deal. Stratasys shares jumped nearly 15 percent on the announcement, closing up $5.23 at $41.21.

"I think the primary reason for the deal is that Stratasys can dramatically expand its sales channels, which have been one of the factors limiting its ability to grow faster," said Steve Dyer, an analyst at Craig-Hallum Capital Group in Minneapolis.

Stratasys makes rapid prototyping machines that spray and bake plastic into precise replicas of new products ranging from tools to coffee pots. Industrial corporations can feed electronic product diagrams into the machines to generate instant physical models. In addition to selling the machines, Stratasys sells special plastics, called consumables, that its machines use to make the prototypes.

The new Stratasys would have expanded international marketing reach and would have two headquarters, one in Eden Prairie and the other in Rehovot, Israel. Scott Crump, Stratasys CEO, would become chairman of the combined company, while Objet CEO David Reis would become the combined firm's CEO.

The combined companies would have a market capitalization of about $1.4 billion, Crump said, and the deal is expected to close in the third quarter. Objet has canceled plans for a $75 million initial public stock offering it filed for in March.

The merger comes two years after Stratasys announced a joint marketing agreement with Hewlett-Packard that was expected to increase Stratasys sales fivefold in five years but failed to have much effect. Investor disappointment resulted in a sell-off of the stock last July.

"What's important here is that we are expanding our footprint," Crump said. "We're almost doubling the amount of product and consumables we offer. And we'll have a bigger foothold in the 70 countries both companies are already in."

Despite the HP disappointment, Stratasys' sales have been rising in the past year as the national economy recovered and as research and development investments in its equipment began to pay off, analysts said. Stratasys earned $20.6 million last year, more than double the previous year, on revenue of $155.9 million, up 32 percent.

Stratasys is benefitting from the maturing of the rapid prototyping market, Dyer said.

"Rapid prototyping, which has been a novelty to a lot of people, is growing into its potential," Dyer said. "More product developers and engineers are getting 3D computer-aided design software, and a logical extension of that is seeing what the product would look like if you made a plastic prototype."

The company also announced Monday its preliminary first-quarter earnings excluding certain expenses of 27 to 29 cents a share, which Dyer said was consistent with expectations.

Under terms of the merger agreement, Stratasys would merge with an Objet subsidiary, making it officially based in Israel. Being based in Israel is expected to save Stratasys $3 million to $4 million a year in taxes, Crump said. In addition, eliminating overlap is expected to save the combined companies another $7 million to $8 million a year, he said.

"I've thought this was a good match for the last 10 years, and I've been trying to make it happen that long," Crump said. Actual negotiations began in October.

The present Stratasys design and manufacturing operations will remain in Eden Prairie, where three-fourths of today's 550 Stratasys employees work. Objet, with 430 employees, would maintain its development and manufacturing in Israel.

Crump said maintaining separate design and manufacturing locations makes sense because the products, while competitive, use different technologies. Stratasys equipment converts computer-aided design drawings into 3D physical prototypes by spraying layers of hot liquid resin that harden into a rigid model, a process called fused deposition modeling. Objet uses technology more akin to ink-jet printers, spraying plastic that hardens into a more detailed but bendable model, he said.

The merger's success depends largely on how well the two companies are combined, Dyer said. "Having the two companies on two separate continents heightens the level of potential integration risk."

Despite the risk, some analysts say the merger could make sense.

"There's been a sense of frustration among investors and inside Stratasys that they haven't been able to penetrate foreign markets any faster than they have," said Bill Frels, CEO of Mairs and Power Inc., a St. Paul investment fund that owns about 2 percent of Stratasys' stock. "This might be the ticket."

Steve Alexander • 612-673-4553