What happened
Shares of Unity Software (U -2.31%) plunged 25.4% in September, according to data from S&P Global Market Intelligence. While the stock broadly followed the general market downward in a period of challenges to the U.S. economy, the content creation software expert also juggled two mutually exclusive merger offers. Moving forward with one proposed deal led to the other suitor withdrawing its Unity buyout offer. Investors didn't like that lost buyout option at all.
So what
Unity has been pursuing a $4.4 billion stock-swap merger with IronSource (IS) since mid-July. AppLovin (APP -2.99%) joined the party three weeks later, submitting a stock-based buyout offer for Unity with a total enterprise value of $20 billion. However, that bid was contingent on Unity dropping the pending combination with IronSource.
Unity's board of directors quickly rejected the AppLovin merger idea, doubling down on the company's commitment to to the IronSource deal. AppLovin considered raising its bid for a few more weeks but officially abandoned that option on Sept. 12. Unity shares fell 13.4% the next day, marking the steepest single-day drop of the month.
When all was said and done, Unity took a 25.4% haircut in September while AppLovin lost 20.9% and IronSource suffered a 15.9% price drop. All of these intertwined stocks underperformed the S&P 500 market index:
Now what
The merger with IronSource is moving forward, and Unity's shareholders voted on the issue on Friday, Oct. 7. Private capital firms Silver Lake and Sequoia support the IronSource deal and have promised to inject more capital into the combined company. Silver Lake and Sequoia are Unity's two largest shareholders currently, with ownership stakes of 11.7% and 9.2%, respectively. These firms have been among Unity's largest investors since its fundraising days before entering the public stock market, and their solid commitment is pretty much a guarantee that Unity's shareholders will approve the merger.
Adding IronSource's monetization and user engagement tools to Unity's game and media engine is aimed at boosting the company's financial results. The companies expect the merged business to generate $1 billion of adjusted earnings before interest, taxes, amortization, and depreciation (adjusted EBITDA) in 2024. By comparison, Unity posted negative adjusted EBITDA of $131 million in 2021, while IronSource pulled in $194 million of positive EBITDA over the same period, adding up to a net operating profit of $77 million.
That's assuming that the business combination is completed without a hitch and that every possible source of synergies is milked to the max; real-world results will likely fall somewhat short of this ambitious billion-dollar target. Even so, Unity plus IronSource makes a lot of sense.
After the ups and downs of this brief but tumultuous period of competing buyout offers, Unity's stock is back exactly where it was after announcing the original IronSource deal. These shares aren't exactly cheap, changing hands at the lofty valuation of 8.8 times trailing sales. Furthermore, Unity has struggled to monetize its excellent app-and-content-building software. The IronSource merger could be the perfect way out of that value trap, but the company has much to prove. I think it's easy to find more exciting investment ideas in this market, leaving Unity and its plethora of question marks untouched for now.
I'm leaving IronSource alone for the same reasons since that company's long-term fate now seems eternally linked to Unity's fortunes.
AppLovin, on the other hand, is more profitable and affordable than Unity. The company also aims for $100 billion in annual revenue in the long term, more than a 30-fold improvement from $2.9 billion over the last four quarters. If you're looking for a safe seat in the Unity-IronSource-AppLovin game of musical chairs, AppLovin is likely your best bet right now.
