Shares of AppLovin (APP -1.77%) tumbled on Tuesday, falling as much as 16.3%. At 12:28 p.m. ET, the stock was still down 11.1%.
The catalyst that sent the app marketing and monetization platform lower was an audacious offer to merge with a larger company in the software space.
AppLovin submitted a "compelling non-binding proposal" to combine with video game engine Unity Software (U -0.38%). Under the terms of the proposed all-stock deal, each outstanding share of Unity stock would be exchanged for 1.152 shares of AppLovin Class A voting stock and 0.314 shares of AppLovin Class C non-voting stock. This would result in Unity shareholders receiving 55% of the outstanding shares of the combined company, while AppLovin shareholders would control the remainder, though AppLovin would maintain 51% of the voting control.
In proposing the combination, AppLovin suggests the "industry's leading platforms would deliver optimal shareholder value and create an unprecedented full stack solution for developers to create, monetize, measure and grow games."
The proposal values Unity Software at $58.85, a 48% premium to its share price on July 12 and an 18% premium based on the stock's closing price on Monday.
AppLovin suggests that the newly created company would target a revenue run rate of $7 billion and adjusted EBITDA of $3 billion by the end of 2024. The proposal also suggests that the combination would result in estimated cost synergies of $500 million by 2024 and $700 million by 2025, citing "operational efficiencies and scale benefits."
Investors are right to wonder whether AppLovin is biting off more than it can chew, especially since it may be a case of too much too soon. Unity Software recently entered into an all-stock deal to merge with app development platform ironSource (IS) in a deal that valued the company at $4.4 billion.
Long-time investors know that any merger or acquisition is fraught with risk, whether it's from overpaying or overvaluing the target company, incorrectly estimating the potential synergies, or failing to head off potential problems resulting from company culture or management differences.
Rumors suggest that some Unity shareholders were unhappy with the ironSource acquisition, potentially prompting the offer from AppLovin.