Why Unity Software, AppLovin, and IronSource Stock crashed in September

What happened

Shares of Unit software (U -8.59%) plunged 25.4% in September, according to data from S&P Global Market Intelligence. While the stock largely tracked the general market down in a time of challenges for the US economy, the content creation software expert also juggled two mutually exclusive merger deals. Moving forward with a proposed deal led to the other suitor withdrawing its takeover offer from Unity. Investors did not like this lost redemption option at all.

So what

Unity has pursued a $4.4 billion stock exchange merger with IronSource (IS -8.53%) since mid-July. AppLovin (APP -6.43%) joined the party three weeks later, submitting an equity-based takeover bid for Unity with a total enterprise value of $20 billion. However, this offer was contingent on Unity dropping the pending combination with IronSource.

Unity’s board quickly rejected AppLovin’s merger idea, doubling down on the company’s commitment to the IronSource deal. AppLovin considered increasing its supply for a few more weeks, but officially dropped that option on September 12. Shares of Unity fell 13.4% the next day, marking the biggest single-day drop of the month.

Ultimately, Unity suffered a 25.4% discount in September, while AppLovin lost 20.9% and IronSource suffered a 15.9% price drop. All of these closely related stocks underperformed the S&P500 market index:

^SPX given by Y-Charts

Now what

The merger with IronSource is progressing, and Unity shareholders voted on the matter on Friday, October 7. Private equity firms Silver Lake and Sequoia support the IronSource deal and have promised to inject more capital into the combined company. Silver Lake and Sequoia are currently Unity’s two largest shareholders, with 11.7% and 9.2% stakes, respectively. These companies have been among Unity’s biggest investors since its fundraising days before entering the public stock market, and their strong commitment is pretty much a guarantee that Unity’s shareholders will approve the merger.

Adding IronSource’s monetization and user engagement tools to Unity’s gaming and media engine is intended to boost the company’s bottom line. The companies expect the combined business to generate $1 billion in adjusted earnings before interest, taxes, amortization and depreciation (Adjusted EBITDA) in 2024. By comparison, Unity posted negative Adjusted EBITDA of $131 million. in 2021, while IronSource generated $194 million of positive EBITDA during the same period, totaling net operating income of $77 million.

This is assuming that the business combination goes smoothly and that all possible sources of synergies are exploited to the maximum; actual results will likely be somewhat short of this ambitious billion-dollar goal. Even so, Unity plus IronSource makes a lot of sense.

After the ups and downs of that brief but tumultuous period of competing takeover bids, Unity shares are back to exactly where they were after the announcement of IronSource’s original deal. These stocks aren’t exactly cheap, changing hands at the high valuation of 8.8x trailing sales. Additionally, Unity has struggled to monetize its excellent app and content creation software. The IronSource merger might be the perfect way out of this value trap, but the company has a lot to prove. I think it’s easy to come up with better investment ideas in this market, leaving Unity and its plethora of question marks untouched for now.

I leave IronSource alone for the same reasons since that company’s long-term fate now seems eternally tied to the fortunes of Unity.

AppLovin, on the other hand, is more cost effective and affordable than Unity. The company is also targeting $100 billion in long-term annual revenue, a more than 30x improvement from the $2.9 billion in the past four quarters. If you’re looking for a safe seat in the Unity-IronSource-AppLovin game of musical chairs, AppLovin is probably your best bet right now.