Why Unity's Weta Acquisition Is a Strategic Win

Last November, Unity Software (U 0.92%) announced that it would be acquiring special effects company Weta Digital in an eye-popping $1.6 billion cash-and-stock deal. The acquisition closed in early December. In this segment of Backstage Pass, recorded on Dec. 17, Fool contributors Travis Hoium, Toby Bordelon, and Jason Hall discuss: Was this deal a good move for Unity? 

Travis Hoium: Unity and Weta, this was a $1.6 billion acquisition from Unity. The way to think about this, this is a bolt-on acquisition for Unity. Unity is making the software that everybody is building games, apps on, content for VR, they're making movies, all kinds of different content is created on Unity's platform.

One of the things that they have never done really well is the really high-end content, and that's what Weta brings into the ecosystem for Unity. I think that's what makes this a really interesting deal.

Weta was Peter Jackson's business. Basically he built these tools because he needed them to make the movies that he wanted to make, starting in, I think it was even the late '80s. But this was a key to making the Lord of the Rings movies. Now they're involved in about five movies a year. Most of the Marvel movies, Weta is involved in one form or another.

What this deal does, it was interesting listening to some interviews that Unity CEO did. As things like the Metaverse and more content creation moves to a higher-end, Unity really wants to be the tools that all of these creators are going to.

They are that tool for mobile devices right now, if you're making a mobile app, Unity is probably a piece of software that you either have or have considered at the very least. But as we move into these higher-end higher graphics businesses, they didn't really have the tools for that.

Weta really brings this into their toolkit, is going to be something that they can distribute to their millions of customers whereas Weta was basically only used by about 1,000 people within the ecosystem of their business, and like I said, only worked on about five movies a year.

It's really democratizing this really powerful piece of content and I think it's something that Unity can leverage better than anybody else in the market. $1.6 billion sounds like a lot for a piece of bolt-on software, but this I think cements their position as the go-to software for all things 3D going forward.

Toby Bordelon: I like this one a lot. If you look at Unity, you need to look at the Fool recommendations, the thesis here is that, Unity is going to take it's stuff and go beyond gaming, they already are. The thesis makes that clear. We're going to buy some expertise, we're going to buy some tools, and a lot of what they have here is like these really great experts in VR, AI, and all this other stuff that they get with this acquisition.

I think it really gives them a leg in this industry, and maybe this is what they need to make that goal a reality, to convince everyone we're far more than gaming, we're everything, and here is step one.

Hoium: Yeah. I think they had to push into the high end. The best analogy that I can come up with is like Unity's content is primarily like the TV show PAW Patrol, [laughs] I have kids, this is a tough one.

Jason Hall: I'm with you, I feel you on this one.

Hoium: Whereas Weta is the perpetual movie, it's a completely different level of quality. That's really the play there for them, is that they think that in the future it's going to be just as simple to create something where you have Pixar quality, hair or waves or whatever features in your AR device that somebody created in a couple of days at a small studio.

That's going to be where we're headed is creating these really, really high quality pieces of content really, really quickly.

Hall: Yeah, this is one honestly, I've been trying to buy since this deal was announced, I've been wanting to add them on my position.

I think people underestimate the scale that this can bring to growing Unity. Not just because of the addition of the tools that are part of Weather, but more broadly, increasing the power of its whole ecosystem of services.

Hoium: Yeah, this is basically Autodesk, about 20 years ago.

Hall: That's their technology, about where they are in their growth phase, let's be clear.

Hoium: Where they are in the business strategically.

Hall: Right.

Hoium: I mean, they are going to be, they are already in the mobile gaming space, the go-to software.

Hall: Right.

Hoium: We're going to see that expand, I mean AR, and VR, they are, I think miles ahead of the Unreal Engine, which is the other alternative there, I think they're just going to get more, and more powerful, and their user base is going to continue to grow because these tools are really easy to use.

That's what's really impressive about Unity Software. Yeah, love this deal.