AppLovin offers to buy video game software maker Unity in $17.5 billion deal

By Nivedita Balu, Krystal Hu and Eva Mathews

(Reuters) -Gaming software company AppLovin Corp made an offer on Tuesday to buy its peer Unity Software Inc in a $17.54 billion all-stock deal, threatening to derail Unity's announced plan to acquire AppLovin's smaller competitor ironSource.

AppLovin has offered $58.85 for each Unity share, which represents a premium of 18% to Unity's Monday closing price. Unity will own 55% of the combined company's outstanding shares, representing about 49% of the voting rights.

AppLovin hired advisers to work out an offer after Unity last month said it would buy ironSource in a $4.4 billion all-stock transaction, sources familiar with the matter told Reuters. Unity's board will have to terminate the ironSource deal if it wants to pursue a combination with AppLovin, according to the proposal.

Under the proposed deal, Unity's Chief Executive John Riccitiello will become CEO of the combined business, while AppLovin Chief Executive Adam Foroughi will take the role of chief operating officer.

Unity said its board would evaluate the offer. The company reported $297 million in quarterly revenue on Tuesday, growing 9% year-over-year, while its operating loss widened. The stock slipped 2.68% after the market closed.

Both companies make software used to design video games. Game-making software has also been expanding to new technologies such as the so-called metaverse, or immersive virtual worlds.

Unity's software has been used to build some of the most-played games such as "Call of Duty: Mobile," and "Pokemon Go", while AppLovin provides helps developers to grow and monetize their apps.

AppLovin's offer comes as game developers and console makers warn of a slowdown in the sector as decades-high inflation and easing of COVID-19 restrictions lead gamers to pick outdoor activities. The company lowered its sales guidance on Tuesday.

"The proposed price for Unity appears well below its intrinsic value, and we would expect Unity to reject it for that reason," wrote Michael Pachter, analyst at Wedbush Securities. "We think interference with the ironSource acquisition is problematic, and will cause Unity’s board to tread very carefully before agreeing to a sale outright."

Shares of Palo Alto, California-based AppLovin, which went public last year, fell 10.29% on Tuesday. Shares of ironSource were down 11.21%. ironSource could receive $150 million in termination fee if Unity decides to walk away, according to the merger agreement.

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