3D content creator platform Unity Software (U 0.77%) made a splash when it announced it was acquiring app monetization company ironSource (IS) in an all-stock deal. Unity is getting its hands on a top peer in the application management space, one that could help it with issues in its own app monetization offering. And though the price offered is a big premium over where ironSource was trading before the deal was announced, the final consideration looks like a fantastic long-term value. I believe Unity is a fantastic buy right now.
The trick with valuing a company when paying with stock
Unity's offer to ironSource was worth $4.4 billion at the time of the deal's announcement. However, because the buyout dictates each share of ironSource be exchanged for 0.1089 shares of Unity, the actual value of this acquisition will vary from minute to minute based on Unity stock's price.
Basically, because Unity stock tanked after the merger was revealed, the deal value immediately dropped from $4.4 billion to $4.1 billion -- based on the 1.15 billion shares outstanding ironSource anticipated having in the second quarter and a Unity stock price of $33. (To calculate the deal value, multiply Unity's current share price by 0.1089, then multiply again by 1.15 billion.)
Either way, the purchase is a nice little bump for ironSource shareholders given the app business was valued at an all-time low as a public company of under $2.4 billion. However, not long after the IPO (via SPAC merger) over the summer of 2021, ironSource briefly fetched an overoptimistic valuation of over $12 billion. Ouch.
A fantastic opportunistic buy
And this is why Unity patching together a deal to buy ironSource now makes so much sense. IronSource is a top tool for app developers looking to monetize their work with ads, an area that Unity has run into trouble with as of late. Because of bad data and issues with an audience pinpointer tool, Unity Monetization hit a snag which led to the company downgrading overall revenue growth for 2022. Plugging ironSource into the mix should help accelerate Unity Monetization's recovery and create a top spot for developers looking to place ads in their apps.
More importantly, though, ironSource is growing and profitable. Management had said it expected at least 36% revenue growth this year to a range from $750 million to $780 million, and a very healthy adjusted EBITDA profit margin of at least 29%. Thus, a cash deal likely would not have been agreeable to ironSource shareholders. By paying in stock, Unity gives ironSource investors the opportunity to participate in the upside of the newly combined entity.
By contrast, Unity's forecast for 2022 is revenue growth of 22% to 28%, and it isn't expected to reach adjusted profitability until next year. Adding in ironSource will immediately accelerate Unity's efforts to generate profitable revenue growth -- a particularly important effort given the market is punishing companies that don't report positive earnings right now. Unity thinks the combined businesses will generate $1 billion in adjusted EBITDA by the end of 2024.
Based on a combined market cap of just over $13 billion ($9.7 billion for Unity and $3.5 billion for ironSource) and a new share repurchase plan up to $2.5 billion once the merger is complete, Unity trades for an incredible long-term value if it can generate a profit within the next two years like management anticipates. Many investors were unhappy with the all-stock deal because it means dilution of their ownership stake, but I'm in Unity Software stock accumulation mode right now.