Unity x Applovin? 😳 | #24
$U x $APP
Another day, another Unity drama. Unity seems like it can’t catch a break 😂. A few of the Unity dramas in the past month are:
The announcement/proposal from Applovin came on the day of the earnings report. ER and Unity x Applovin would be a great article but would be long, so I am going to write about ER in the next post. TLDR; ER was so so, with showing potential in future via partnerships.
Overview
🧾 The offer
📢 My thoughts
🤓 Conclusion
🧾 The offer
Applovin ($APP) is an ad tech company primarily focused on mobile. Unity is a leading company in the development of real-time 3D content. The merger or acquisition makes perfect sense. Here are the key parts of the offer:
Applovin to buy Unity in an all-stock deal worth $20B or $58.85 ps (18% premium)
Unity share will be exchanged for 1.152 class A voting shares of AppLovin and 0.314 class C non-voting shares (and not listed) of AppLovin
The total value of the combined entity will be $35 billion
Unity shareholders will hold 55% of shares and 49% of voting rights of the combined company
U x APP can generate $700M EBITDA by 2025
John Riccitiello to be the CEO and Adam Foroughi to be COO of the combined company
If U x APP happens U x IS should be terminated
📢 My thoughts
I am a shareholder at both APP 0.00%↑ and U 0.00%↑. In fact, I love APP and I see it as a potential multi-bagger. You can read about it here. I like the company doesn’t mean I like the deal. One thing that I like about the deal is synergies make sense. I think Applovin was worried about losing their market share and edge (that they get with Lion Studios and other first-party developers) to IS - given that U x IS should be terminated if U x APP was to happen.
In terms of the deal itself, I see a few issues. They are:
The premium of 18% is low: Given the upside of U as a stand-alone company (its fundamentals haven’t deteriorated and a 75% decline can be thanked market conditions). Unity was being traded at 20x to 40x earnings, now it’s being traded at 9x. Once the market condition gets better (in a year or two) and it starts trading at 20x-40x, the return potential in a few years is 2x to 4x.
Devaluing standalone business: Even without U x IS, Unity was in a good position for growth. With recent acquisitions (Weta, Ziva) and partnerships (Microsoft)- Unity is on a path of growth. The premium doesn’t seem to be looking at the future potential of the company.
🤓 Conclusion
APP x U was a surprise and most probably the result of U x IS. While the deal looks good from the strategic point of view - technology merging, greater market share in ads business, easier access for developers to monetize. From a financial point of view, the deal isn’t as attractive for a Unity shareholder