Unity Software stock is trading sharply lower after the company announced a merger with ironSource and lowered its 2022 guidance. The stock was anyways underperforming the markets this year and has extended its slump further.
Unity Software would acquire ironSource for $4.4 billion which is a 75% premium to the company’s 30-day average exchange ratio. While it is usual for companies to pay a premium for acquisitions, the 75% premium is steeper than what we usually see. The premium is even higher than what Elon Musk had offered for Twitter. Musk has now walked out of the deal and Twitter is suing the company for “specific performance”
ironSource stock is trading higher today given the massive premium that Unity Software is offering to acquire the company. Unity Software has justified the merger by calling it “highly accretive” and said that it would deliver $1 billion in adjusted EBITDA by the end of 2024. The company expects $300 million in annual EBITDA synergies in three years after the merger completion.
Unity Software announced ironSource Merger
The merger would be in the form of an all-stock transaction which would mean that Unity Software would not be spending cash to acquire ironSource. The company also announced a $2.5 billion stock buyback after the merger is closed. The buyback is quite significant as it is equivalent to a quarter of Unity Software’s current market cap.
In its release, Unity Software said, “The deal will bring together the Unity game engine and editor, Unity Ads, and the rest of Unity Gaming Services (UGS) with ironSource’s best-in-class mediation and publishing platforms, giving developers a seamless and interoperable way to create, grow, and monetize their creations across their lifecycle. In the near term, ironSource’s mediation platform will leverage the combined strength of the two companies’ ad networks to deliver increased user reach and data scale, and provide an increased return on ad spend to advertisers.”
Unity Software Stock Has Slumped amid the Crash in Growth Stocks
Federal Reserve’s rate hikes have taken a toll on growth stocks and Unity Software is no exception. The company went public in 2020 in what was a record year for the US IPO market. It priced the IPO at $52 and debuted at $75 per share. It had raised the IPO price multiple times, which was quite usual for companies at that time. The company also took control of IPO pricing from investment bankers in an unusual step.
However, the stock has since slumped. Roblox, which delayed its IPO to 2021 and eventually opted for a direct listing has slumped. Both Roblox and Unity Software are among the companies that are plays on metaverse. Facebook changed its name to Meta Platforms and is investing billions in metaverse. Facebook stock has slumped this year and is the second worst FAANG stock of the year. Netflix is the worst performing FAANG stock of the year and is also the worst performing S&P 500 stock of the year.
Unity Software also revised its 2022 guidance. While it said that its second-quarter earnings would be slightly ahead of the guidance, it lowered the full-year revenue guidance from $1.35-$1.425 billion to $1.3-$1.35 billion. Markets have punished growth companies that are witnessing a worse-than-expected slowdown.
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