Unity rejects AppLovin’s $20 billion merger offer

Unity announced this morning that it is committed to its merger with ironSource and will reject AppLovin’s $20 billion proposal.

Last month, the news broke that Unity — a widely-used game engine — would merge with ironSource, a mobile app monetization and distribution company. But the Israeli company’s larger competitor AppLovin submitted an unsolicited takeover bid to Unity with the condition that they terminate their deal with ironSource.

Unity powers thousands of games across consoles, but when it comes to mobile apps, Unity supports popular games like Pokémon Go, Animal Crossing: Pocket Camp, Call of Duty: Mobile and more. Unity CEO John Riccitiello said that he was interested in merging with an app company like ironSource because it would give Unity developers more tools to grow and monetize mobile games. Plus, in the midst of a macroeconomic downturn, M&A can jump-start user growth, especially as valuations drop and venture capital becomes harder to come by. Despite its prevalence in the video game market, Unity is losing money. The company posted a net loss last quarter of $177.6 million, an increase year-over-year from $107.6 million.

As TechCrunch’s Ingrid Lunden pointed out, both Unity and ironSource are familiar with this M&A playbook. In January, ironSource acquired Tapjoy for $400 million. In the same month, Unity acquired Ziva Dynamics to expand the tools that it offers to games and other interactive developers, for an undisclosed sum.

In AppLovin’s proposal, Unity would have owned 55% of the merged company’s shares, representing 49% of voting rights. But in the agreement with ironSource, the Israel-based company will become a wholly owned subsidiary of Unity. As part of the deal, Silver Lake and Sequoia will purchase an aggregate $1 billion in convertible notes at deal close.

By the numbers, the potential deal with AppLovin would have been more significant; Unity valued ironSource at $4.4 billion, whereas AppLovin’s proposal was worth $20 billion. AppLovin estimated that if it merged with Unity, the consolidated company could reach an estimated run-rate adjusted EBITDA of over $3 billion by the end of 2024. With the ironSource proposal, that number is only $1 billion. But the original deal with ironSource gives Unity more control in the long run, and the Unity Board determined that AppLovin’s offer was not a “superior proposal.”

“The Board continues to believe that the ironSource transaction is compelling and will deliver an opportunity to generate long-term value through the creation of a unique end-to-end platform that allows creators to develop, publish, run, monetize and grow live games and real-time 3D content seamlessly,” said Riccitiello.

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