First, Unity's offer represented a 74% premium to ironSource's 30-day average trading price, and the all-stock deal will dilute Unity's existing shares by more than 30%. Second, Unity plans to take on $1 billion in fresh debt after the deal closes and buy back $2.5 billion in shares to offset some of that dilution.
Lastly, the decision came right after Unity laid off about 4% of its workforce, with most of the job cuts hitting its struggling Unity Ads division. Buying ironSource strongly implies that Unity has given up on fixing its own broken advertising algorithm -- which caused its revenue growth to decelerate significantly this year -- as it buys an alternative solution instead.
Earlier this month, I discussed why the ironSource deal raised red flags for Unity's future. However, I didn't discuss the fact that ironSource had also been criticized for developing advertising malware in the past. That sketchy history could actually be the most troubling thing about Unity's takeover.
A closer look at ironSource
ironSource was founded in 2010. Its first product was InstallCore, an installation program for internet-based applications. InstallCore hit its peak usage of 100 million monthly installations in 2012.
Unfortunately, InstallCore was also used to bundle unwanted software and browser add-ons with legitimate installations. That deceptive practice became so widespread that Microsoft's Windows Defender, Malwarebytes, and other anti-malware applications started flagging InstallCore as malware.
That setback forced ironSource to merge with Supersonic, a developer of mobile app monetization services, in 2015. That merger, along with several subsequent acquisitions, enabled ironSource to evolve into a mobile app monetization company and reduce its dependence on InstallCore.
However, ironSource didn't fully discontinue InstallCore until 2020, just one year before it agreed to go public by merging with the SPAC (special purpose acquisition company) Thoma Bravo Advantage.
It still has a toxic reputation
ironSource might not develop InstallCore anymore, but many software developers still associate the company with the controversial product.
Shortly after the merger was announced, Twitter was flooded with complaints from game developers slamming Unity's decision to merge with a "malware" developer, as well as speculation that Unity could inject advertising malware into its game development engine. Unity's laid-off employees also criticized the company's decision to buy ironSource instead of fixing its own advertising platform.
In response, Unity admitted that InstallCore's "desktop platform occasionally suffered from bad actors who tried to abuse the platform," but noted it was no longer part of ironSource's business. Unity also pointed out that ironSource only develops "products for mobile game and app developers and doesn't operate any desktop software distribution platforms today."
Investors shouldn't overlook the possible advantages
ironSource's previous association with InstallCore is troubling, but investors shouldn't overlook its strengths. Unlike other SPAC-backed tech companies, ironSource didn't offer wildly unrealistic projections for its long-term growth.
Last March, it predicted its revenue would rise 37% to $455 million in 2021, and its adjusted EBITDA (earnings before interest, taxes, depreciation, and amortization) would grow 25% to $130 million. In reality, its revenue increased 67% to $553 million for the full year, as its adjusted EBITDA surged 87% to $194 million. That growth can be partly attributed to its acquisitions of Tapjoy and Bidalgo.
In 2022, ironSource expects its revenue and adjusted EBITDA to rise about 38% and 21%, respectively. Both those estimates also exceeded its pre-merger guidance.
Based on those expectations, Unity's $4.4 billion bid only values ironSource at six times this year's sales and 19 times its adjusted EBITDA. That valuation doesn't seem terribly expensive, even if Unity paid a significant premium over its depressed price.
Unity's takeover of ironSource also makes strategic sense, since many developers that use its game engine's free tier already turn to ironSource to monetize their games. That trend could certainly result in both platforms being associated with lower-quality and ad-supported free games -- but it could also fill the void Unity Ads had been struggling to monetize.
Don't dismiss this deal just yet
Warren Buffett once famously said, "It takes 20 years to build a reputation and five minutes to ruin it." ironSource certainly made that mistake with InstallCore, and its reputation as a malware developer could continue to haunt the company -- as well as Unity -- for years to come.
That said, investors shouldn't dismiss Unity's merger with ironSource as an 11th-hour attempt to fix Unity Ads. This deal makes sense on several levels, and could actually help Unity achieve its long-term goal of generating more than 30% annual revenue growth again if it plays its cards right.