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

While the music trails away ever so-softly, once high-stepping US software darlings need to find dance partners while they can. On Tuesday, Unity said it would acquire ironSource for $4.4bn, paying a hefty 74 per cent premium. Despite the price, this deal hardly inspires.

Unity is paying in its shares which have fallen more than 80 per cent since their 2021 peak. These companies, not quite household names, came to the public markets during an extraordinary boom time for technology companies both promising massive growth.

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

Both insist that the deal does not reflect desperation in reaction to the ugly environment for growth companies. Rather, they argue that Unity’s business fits with ironSource’s tools used by mobile phone app developers to generate cash from Unity’s platforms.

Still with central bank monetary tightening in the early stages, the quick tempo of investor demand for nascent tech companies looks to have faded. Consolidation can help excise costs to lift profit margins when investors demand cash flow and profits over mere revenue growth.

Unity shares fell 15 per cent on Wednesday in reaction to the dilution from issuing billions in stock, even after its valuation had contracted for months. Using stock as payment, however, is necessary. Unity thus avoids tacking on debt while both company’s shareholders benefit from the hopeful realisation of cost savings over time.

Perhaps most interesting, two prominent Silicon Valley private capital investors, Sequoia and Silver Lake are together putting $1bn in the new, enlarged Unity through the purchase of a convertible bond. The new company also has authorisation to buy back $2.5bn of stock. All parties will hope that if Unity itself and two top firms are willing to buy shares, this could signal to others to join the happy jig as well.