Shares of Unity Software (U 0.77%) plunged on Wednesday morning, but shares of ironSource (IS) skyrocketed. And believe it or not, these moves were for the same reason. Unity and ironSource are merging. As of 10 a.m. ET, Unity was down by 13%, while ironSource was up 52%.
While the companies are calling this a merger, it's more like Unity is acquiring ironSource. The all-stock deal values ironSource at $4.4 billion. The market capitalization of ironSource was around $2.3 billion prior to the announcement, so Unity is paying a significant premium for the company.
This explains why ironSource rose so much, and also why Unity stock is down. As of Tuesday's close, Unity's market cap was around $12 billion, so a $4.4 billion deal is roughly one-third of Unity's size. Naturally, an all-stock deal of this magnitude will put downward pressure on shares.
However, Unity is trying to mitigate the dilution. In conjunction with the deal announcement, it also announced a $2.5 billion share repurchase program. And two of Unity's largest shareholders are committing $1 billion each in convertible notes.
IronSource offers numerous platforms and tools, but its bread-and-butter business is helping to monetize mobile apps. This overlaps with Unity's Operate segment, which it's trying to fix right now after faulty data caused the company to have to rebuild its algorithm from scratch -- a problem that it doesn't expect to resolve until later this year, and one that will cost it an estimated $110 million in lost revenue.
By merging with ironSource -- a company that has been executing well -- Unity may be attempting to fast-track its recovery. This is good news for Unity shareholders, in my opinion.
For ironSource shareholders, it's probably disappointing. Even with Wednesday morning's big gain, the stock is still down by more than 70% compared to the price at which it went public roughly one year ago via a merger with a special purpose acquisition company. The silver lining is that with an all-stock deal, ironSource shareholders can choose to hold Unity stock after the merger to maintain their exposure to future upside in the app economy.