Unity – Love triangle

Two is a company, three is a crowd.

• AppLovin, a marketing and monetisation toolkit for app developers has offered to acquire Unity in a deal that looks defensive as it fears both the impact of greater vertical integration and the digital advertising slowdown on its ability to compete.
• AppLovin has both a set of marketing tools and a suite of 350 mobile games and competes directly with ironSource which Unity is in the process of acquiring.
• Unity has a platform for the development of apps that takes away the headache of porting to iOS, Android etc which it monetises through mobile advertising.
• Digital advertising is under pressure thanks to macro weakness which has pushed valuations down meaningfully making it more attractive to look at M&A.
• The industry has effectively admitted that consolidation is needed as Unity has already agreed to buy ironSource which will deepen its presence in digital advertising and allow it to monetise its Unity platform more widely and effectively.
• AppLovin clearly fears the impact that this combination will have on its ability to compete given how dominant Unity is in the space of mobile gaming.
• A large proportion of mobile games are created using Unity and should ironSource move in-house, this will create real problems for AppLovin as its clients who use Unity would have an incentive to switch.
• This is why I think AppLovin is willing to concede its sovereignty to Unity as it is proposing that 55% of Newco will be owned by Unity shareholders and that John Riccitiello from Unity ends up in charge.
• AppLovin is also making the termination of the ironSource acquisition which makes complete sense as merging all three together would create overlap which would then have to be eliminated.
• Given Unity’s sense of what it is worth, I suspect that it will reject this deal and press on with ironSource which will put AppLovin in a pretty tricky position.
• All of this noise has obscured the fact that both Unity and AppLovin have downgraded their revenue expectations for the full year highlighting that the blue-sky growth that investors are still paying for is not going to materialise to the degree expected.
• Hence, while I continue to believe that Unity has a unique position in the Metaverse (see here), it and all of its cohorts remain overvalued for the business case that they will address in the medium term.
• This is why the only way that these deals look any good is if they are paid for in shares as overvalued paper buying overvalued paper does not really matter very much in the long-term.
• I suspect this is why AppLovin’s proposal and Unity’s combination with ironSource are both all-stock transactions.
• Off the three, I think Unity is in the driving seat which combined with its positioning for the Metaverse (if it takes off) is why I want to own the shares long-term.
• I just think I will get an opportunity to own it much lower than here as valuations continue to be under pressure which is why I am quite content to wait.