ironSource surges after Unity Software agrees to acquire in $4.4B all stock deal

Michael Vi

ironSource (NYSE:IS) jumped 52% in premarket trading after Unity Software (NYSE:U) agreed to purchase the company in a $4.4 billion deal. Unity fell 6.5% at least partly after reducing its 2022 revenue forecast.

Each ordinary share of Tel Aviv-based ironSource (IS) will be exchanged for 0.1089 shares of Unity (U) common stock, according to a statement. The deal represents a 74% premium to the 30-day average exchange ratio.

Once closed, current Unity (U) stockholders will own approximately 73.5% and current ironSource (IS) shareholders will own approximately 26.5% of the combined company. Silver Lake and Sequoia, the two largest Unity shareholders, committed to investing an aggregate $1 billion in Unity in the form of convertible notes to be issued at closing.

Adtech firm ironSource, which went public through a SPAC deal with technology private equity giant Thoma Bravo just over a year ago, appears to be taking a huge haircut in its sale to Unity as it was originally valued at $11 billion when it went public last year. ironSource (IS) shares have plunged over 80% since going public.

The deal is expected to deliver a run rate of $1 billion in adjusted EBITDA by the end of 2024, and $300 million in annual EBITDA synergies by year three.

The Unity board also authorized a share buyback program of up to $2.5 billion effective upon closing of the transaction. The deal is expected to close during Unity’s 4Q.

ironSource also reaffirmed (IS) 2Q and full-year 2022 guidance provided during its 1Q earnings call. Unity (U) expects 2Q financial results to be slightly higher than the top end of the guidance range provided during its first quarter earnings call. Unity reduced full-year 2022 revenue guidance from $1,350 - $1,425 million to $1,300 - $1,350 million.

Morgan Stanley served as lead financial advisor to Unity. Goldman Sachs also served as financial advisor to Unity.

Late last month, Unity Software (U) has laid off hundreds of staffers in broad-ranging cuts, according to media reports.

Comments

[SarahConnor74]

I don't even know what to do with this... I was planning on buying more Unity shares today and now I am wondering if I should buy IS shares at 3.30, but for a.1089 per Unity share (about 9 IS shares for 1 Unity share) when deal closes end of year, does it even make sense? any thoughts on this guys?

Btw, since the announcement was today, if I buy IS today or tomorrow, would my IS shares be part of this?

[Wellington999]

@SarahConnor74 IS is a way to buy U for a slight discount but need for U to level out first..

[SarahConnor74]

@Wellington999 Thank you for confirming what the math was working out in my head!lol, but I keep reading lot of negativity by IS investors on the news; they might dump their stock and I will be stuck in the red for awhile. I am just closely watching the action to decide if the slight discount is worth jumping into the drama. I might just buy Unity on the dip instead and move on. As for Unity leveling out, who knows... Unity is one of those stocks that normally spring up, but taking this buyout into consideration is going to take folks a bit to wrap their brain around this news. I am on board with Unity purchasing IS, the pros in my mind outweigh the cons as long as you are long term. We shall see how it plays out.

[Allen Greathouse]

A lot of interesting commentary about this deal. On the one hand, IS is profitable and growing fast which should speed up Unity’s own path towards profitability. On the other hand, adtech has a lower moat and the price they are acquiring the company for isn’t exactly a steal. I’ll have to dig a little deeper on this and perhaps write another article.

[Dougmayer]

No word of a call to discuss the deal/ guidance cut?

[AlphaSierra]

U will cut a lot of jobs to cut costs, is reducing the guidance again(!) and wants to do now a huge and complex $4B deal ? I am confused

[Adambombfx]

@AlphaSierra

And you should be confused, as Management at U has NO CLUE what they are doing !

[Adambombfx]

@AlphaSierra

For the record :

U management is clueless as noted in the Q1 when management acknowledged an artificial intelligence error with its monetization service due to bad initial data. In other words, the company took on faulty data from a large customer and built its AI on it, which caused inaccuracies..

Management at U is UNINVESTIBLE and RECKLESS !!

As a result, management will have to rebuild, retrain, and improve its AI with new data. As a whole, this error will impact the top line to the tune of $110 million over the rest of 2022.

Add this to the company's $177.6 million net loss in Q1, which jumped 65% year over year, and I DON'T WANT UNITY SHARES. The company's trailing-12-month free cash flow of just $34 million isn't enough to excite me, and in my opinion,Unity will erode all IS value .

Unity stock price is dropping like a rock tight now and bring IS price down with it.

[Wellington999]

@Adambombfx hedges behind these deals, maybe a shotgun wedding lol

[Amstragram]

What a weird deal … Thoma Bravo SPAC is a gigantic stain on this firm overrated reputation. iS shareholders are selling at -70% of the insanely high spac listing price, for an AdTech which is at the end just a clickbait factory. And what is the link with the also insanely highly valued Unity which was supposed to be this game-developers champion. Weird …

[Liquidity Swords]

@Amstragram clearly there are some "smartest guys in the room" types drinking pitchers of Unity Kool-Aid

[Amstragram]

@Liquid Swords you don’t even know what your sentence means :D … nor what I meant. Actually you why did you even write anything

[Liquidity Swords]

@Amstragram sry for mixing metaphors, I meant: IS major shareholders who are undoubtedly sitting on big losses are betting on Unity's also much diminished shares for stronger hype potential to recoup losses

[Dougmayer]

Mr Market is giving away mark down deals in the tech space right now. A great time for U to grab a fantastic deal.

[Jamm Systems]

I thought I knew what U did, but boy was I wrong.

I always thought that what makes U special is their game engine ecosystem. But then why would a game engine developer acquire an ad-tech company in a very materially dilutive deal? Did U decide there's just not enough future on the game engine side, so they're going to leverage their game engine distribution to sell ads? I'd have thought that this is one of the worst strategic acquisitions I've ever seen, but clearly I missed something.

As go synergies, not for nothing that one of these companies is based in CA and the other Israel.

Real head scratcher. Worth staying on the sidelines just for that.

[Liquidity Swords]

@Jamm Systems I think the best summary is: Unity is well aware that there are only so many game devs they can sell their software to. So now they are trying to jump on the monetization bandwagon and get a piece of the revenues brought in by the games their customers create. This line of thinking at U started before this IS acquisition and is an acknowledgement that their flagship game dev software itself is ultimately just a niche product no matter how good it is (and it is good, just limited TAM).

[Jamm Systems]

@Liquid Swords Hey Liquid, I completely agree.

This helps explain why $U has fallen from $200 to $34.

And $IS has found that they have a ton of competition and too little differentiation.

So the merger makes sense because, independently, both companies realized they have a pretty mediocre outlook. Together, they at least could hope for better.

A cynic would say that the accounting complexity resulting from the merger, including write downs, etc, can help the stock price.

Myself, I think it's not the sort of move that healthy companies with a strong outlook do. And the fact that U is in CA and IS is in Israel WILL make the integration more difficult.

Further, the Hail Mary into ad tech for $U will distract them from what they do best. It's one thing to do a small, strategic acquisition to get better at ad tech. That's not what happened here. $U bet a big piece of their company on this acquisition. Because the deal was about the stock price as well as strategy.

All in all, not only unimpressive IMO. I think it's a really sucky move by $U.

[Wellington999]

I picked up some IS last week but curious why they are selling out at such a low price...either they are super worried about the economy or just love Unity so much they think taking stock in that is the best way to go or maybe their backers are forcing them to cash out..

[Liquidity Swords]

Can't really complain here since my IS cost basis is in the low 2s. But I've long thought Unity was one of the most grossly overvalued and overestimated companies in tech, while IS had become a total overlooked gem. It's like duh, of course this will be immediately accretive to Unity's earnings, because Unity *doesn't have earnings* lol. Speaking as a software dev, I think Unity is doomed to forever be a niche product who's best hope is to be acquired by Adobe or Microsoft. I'm going to take some time to digest this further and decide what I'm going to do with my shares but there must be a lot of pissed off underwater IS bagholders out there and I expect some ugly pushback (and probably lawsuits) to come.

[scone22]

35% fwd growth during rampant inflation, war in Europe, and incoming recession… and we’re selling while trading at a trailing PE of 12? This is an awful deal for IS

[Danjw2]

Seems like a great deal for Unity, yet it's down over 7% in the premarket as I write this.

[pumpstick]

I guess Unity and IS management are the winners here.

This is why a bear market is dangerous. You can buy a stock at a good price and still loose money unless you keep averaging down.

My personal opinion is that this deal should not be legal.

[Scarlo]

@pumpstick Yep. I averaged down on IS and have an average cost a little under $5 per share. A good price for a long term hold, I had thought... but Lo & behold... :'(

[Liquidity Swords]

@pumpstick hard to see how this is a good deal for IS management. Any way you look at it, they are selling out at far below the IPO price a year ago. I guess the only argument that they can make is that Unity is down even further from its peak and has the potential to roar back higher?

[lowdawg81]

@Liquid Swords
It wasnt an IPO it was a SPAC, which is a glorified capital raise from the highest bidder. Not only the highest bidder but one done near the end of a bubble.

[Adambombfx]

This is a joke !!!

I just bought IS Yesterday for a 3 year hold,and now today they merge dirt cheap.Unity gets the best deal out of this and all IS shareholders get burned !!!

This merger should not get completed, I do not want Unity Shares and don't want to be forced to sell IS to bank a profit before this deal completes.

IS can easily trade at $10 p.s.12 to 18 months from now as a stand alone company and this was the reason I bought yesterday,today I get BURNT !!!!

[Danjw2]

@Adambombfx Yeah, what a shame, you only made 50% in one day.

[Adambombfx]

@Danjw2

This is a bad deal for IS !

[Wellington999]

@Adambombfx It isn't a cash deal so maybe IS will help U improve their profits...they seem to think so ...you can get your U stock and then sell calls against it

[CovLad]

what the hell I am in for IS around $7 a share, good deal for Unity but not for IS shareholders

[Wellington999]

@CovLad now you just need U stock to get up to near $70 at some point ...not impossible

[Ben Ken]

Unity have nabbed themselves a bargain

[TUB Investing]

If I am not wrong, IronSource IPO not long ago at over 10bn. Great deal for unity in my opinion!

[Scarlo]

@TUB Investing If the world was a just place, IS management would have 0 incentive to make a deal like this, but somehow it must be making cents for them... >_<

[TUB Investing]

@Scarlo totally understand

[Indy72]

Good buy for Unity.