Unity Software gets ironSource for an absolute bargain price

3D content creation platform Unity software (and 3.69%) caused a stir when it announced it would acquire an app monetization company iron source (IS 6.40%) in an all-stock deal. Unity is getting a top application management peer who could help it with problems with its own app monetization offering. And while the price on offer is a huge premium over where ironSource was trading before the deal was announced, the final consideration looks like fantastic long-term value. I think Unity is a fantastic buy right now.

The trick to valuing a company when paying with shares

Unity’s offer to ironSource was valued at $4.4 billion at the time the deal was announced. However, since the buyout dictates that each share of ironSource be exchanged for 0.1089 shares of Unity, the actual value of this acquisition will vary by the minute based on Unity’s stock price.

As Unity shares plummeted after the merger was announced, the transaction value fell from $4.4 billion to $4.1 billion essentially instantly — based on the 1.15 billion shares outstanding, which ironSource reported in the second quarter expected and a Unity stock price of $33. (To calculate transaction value, multiply Unity’s current stock price by 0.1089, then multiply by 1.15 billion again.)

Either way, the purchase is a nice little bump for ironSource’s shareholders, as the app business has been valued as a public company at an all-time low of under $2.4 billion. Not long after its IPO (via the SPAC merger) in the summer of 2021, however, ironSource briefly posted an overly optimistic valuation of over $12 billion. Ouch.

A fantastic bargain

And that’s why it now makes so much sense for Unity to piece together a deal to buy ironSource. IronSource is a top tool for app developers looking to monetize their work with ads, an area Unity has struggled with lately. Due to poor data and problems with an audience pinpointer tool, Unity Monetization hit a snag that caused the company to downgrade overall revenue growth for 2022. Bringing IronSource into the mix should help accelerate the recovery of Unity Monetization and give it a top spot for developers looking to place ads in their apps.

More importantly, ironSource is growing and profitable. Management had said it expected revenue growth of at least 36% this year, to a range of $750 million to $780 million, and a very healthy adjusted EBITDA profit margin of at least 29%. Therefore, a cash deal would likely have been unacceptable to ironSource shareholders. By paying in shares, Unity gives ironSource investors the opportunity to participate in the upside of the newly combined company.

In contrast, Unity is forecasting revenue growth of 22% to 28% for 2022 and isn’t expected to reach adjusted profitability before next year. The addition of ironSource will immediately accelerate Unity’s efforts to generate profitable revenue growth — a particularly important effort given that the market penalizes companies that aren’t currently reporting positive earnings. Unity expects the combined businesses to generate $1 billion in Adjusted EBITDA by the end of 2024.

Based on a combined market capitalization of just over $13 billion ($9.7 billion for Unity and $3.5 billion for ironSource) and a new share repurchase plan of up to $2.5 billion upon closing of the merger, Unity trades for incredible long-term value if it is able to generate a profit within the next two years, as management expects. Many investors were unhappy with the all-stock deal because it dilutes their ownership interest, but I’m in Unity Software stock accumulation mode right now.

Nicholas Rossolillo and his clients hold positions at Unity Software Inc. The Motley Fool holds positions at Unity Software Inc. and recommends Unity Software Inc. The Motley Fool has a disclosure policy.

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