Software M&A: Consolidation may be the only way to face the music

As the music fades away, once pompous US software darlings must find dance partners while they can. On Tuesday, Unity announced it would acquire ironSource for $4.4 billion at a hefty 74 percent premium. Despite the price, this deal hardly excites.

Unity is paying in its shares, which are down more than 80 percent since their 2021 peak. These companies, not exactly household names, came to the public markets during an extraordinary boom for tech companies, both of which promised massive growth.

With software that helps design video games and 3D graphics, Unity was one of the most hyped IPOs of 2020, rocketing up a third on the 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 ugly environment for growth companies. Rather, they argue that Unity’s business aligns with ironSource’s tools used by mobile app developers to monetize Unity’s platforms.

While the central bank’s monetary tightening is still in its early stages, the fast pace of investor demand for emerging technology companies appears to have slowed. Consolidation can help consume expenses to increase profit margins when investors demand cash flow and profits over sheer revenue growth.

Unity shares fell 15 percent on Wednesday in response to dilution from the billions-dollar share issuance, even after months of falling valuations. However, the use of shares as a means of payment is required. Unity thus avoids incurring debt while shareholders of both companies benefit from the hopeful realization of cost savings over time.

Perhaps most interestingly, two prominent Silicon Valley private equity investors Sequoia and Silver Lake are jointly investing $1 billion in the new, expanded entity through the purchase of convertible bonds. The new company also has approval to repurchase $2.5 billion worth of stock. All parties will be hoping that if Unity itself and two top firms are willing to buy shares, it could signal others to join the merry game as well.

Software M&A: Consolidation may be the only way to face the music Source link Software M&A: Consolidation may be the only way to face the music

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