Market Savages Unity Software Merger with App-Monetization Platform Provider ironSource

Unity Software has agreed to an all-stock merger deal, valuing ironSource at roughly $4.4 bln, a 74% premium to the 30-day average exchange ratio, ironSource $IS was up 51% from the previous day close, though still trades around 75% below record highs set in September. Unity is trading at 8x forward sales, the company operates in priced-to-perfection territory given the current rising-rate environment. The market took harshly to the deal knocking $U down -17% to near the all-time lows seen after Q1 results in early May.

In the all-stock agreement, each IS share will be exchanged for 0.1089 Unity shares, the company noted that the merger is highly accretive, estimated to deliver a run rate of $1 bln in adjusted EBITDA by FY24 and $200 mln in annual EBITDA synergies by year three.

Unity in Q1 had issues with monetization whereby their monetization model focuses on pay-for-performance end-user acquisition, where advertisers pay based on set targets, such as the number of installs.

The issue came with a fault in Unity’s Audience Pinpointer tool, which helps drive installs at scale, its accuracy was reduced in Q1. Additionally, Unity saw an approximately $110 mln hit to annual revenue in FY22 due to losing the value of a portion of its data after ingesting bad data from a large customer.

Message boards lit up with disappointed investors in Unity choosing to spend billions of dollars through an all-stock transaction to help improve monetization. The feeling by many was the company should be instead working to fix and improve its own set of tools.

Then when you look at ironSource it’s near-term outlook is hardly inspiring. While $IS did prove profitable with earnings of $0.05 in Q1. However, revenue growth is expected to decelerate considerably. ironSource guided to Q2 revs of just $180-185 mln, translating to +35% growth at the midpoint, well below its previous quarterly rates of over +45%.

Meanwhile, ironSource trimmed its FY22 sales outlook, going from +46% growth yr/yr at the midpoint to only +38%. Seasonal trends and overall macroeconomic uncertainty are seen impeding future sales.