Software mergers and acquisitions: Consolidation may be the only way to deal with music

As the music slowly fades away, the darlings of the once cutting-edge American software must find dancing partners while they can. On Tuesday, Unity announced that it would acquire ironSource for $4.4 billion, paying a hefty premium of 74%. Despite the price, this offer hardly inspires.

Unity is paying for its shares which have fallen more than 80% since their 2021 peak. These not-quite-known companies hit the public markets during an extraordinary boom time for tech companies, both promising massive growth.

With software that helps design video games and 3D graphics, Unity was one of the highest-profile IPOs of 2020, exploding by a third on its first day of trading. IronSource began trading in 2021 after a reverse merger with a SPAC vehicle created by buyout titan Thoma Bravo.

Both insist the deal does not reflect desperation in response to the dire environment for growing businesses. Rather, they argue, Unity’s business is ironSource’s tools used by mobile phone app developers to generate money from Unity’s platforms.

Also with early central bank monetary tightening, the rapid pace of investor demand for fledgling tech companies appears to have waned. Consolidation can help excise costs increase profit margins when investors demand cash flow and earnings rather than just revenue growth.

Unity shares fell 15% on Wednesday in reaction to the dilution from issuing billions of shares, even after its valuation contracted for months. The use of stock as a means of payment is however necessary. Unity thus avoids taking on debt while the shareholders of both companies benefit from the hope of realizing cost savings over time.

Perhaps most interestingly, two leading Silicon Valley private equity investors, Sequoia and Silver Lake, are together investing $1 billion in the new expanded Unity through the purchase of a convertible bond. The new company also has approval to repurchase $2.5 billion in stock. All parties are hoping that if Unity itself and two major companies are willing to buy stock, it could signal others to join in the jig as well.

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