shares of AppLovin (APP-12.18%) fell to 16.3% on Tuesday. At 12:28 p.m. ET, the stock was still down 11.1%.
The catalyst that brought down the app marketing and monetization platform was a bold proposal to merge with a larger company in the software space.
AppLovin submits “compelling non-binding offer” for combination with video game engines Unity software (U-1.19%). Under the terms of the proposed all-stock deal, each outstanding share of Unity will be exchanged for 1.152 Applowin Class A voting shares and 0.314 Applowin Class C non-voting shares. This would result in Unity shareholders receiving 55% of the combined company’s outstanding stock, while Applowin shareholders would control the remainder, although Applowin would retain 51% of the voting power.
Proposing the combination, AppLovin suggested that “the industry-leading platform will deliver optimal shareholder value and create an unparalleled full-stack solution for developers to create, monetize, measure and develop games.”
The offer values Unity Software at $58.85, a 48 percent premium to the share price on July 12 and an 18 percent premium based on the stock’s closing price on Monday.
AppLovin proposes that the newly formed company will target a revenue rate of $7 billion and Adjusted EBITDA of $3 billion by the end of 2024. The proposal also states that the merger will result in an estimated cost synergy of $500 million and $700 million by 2024. 2025, citing “operational efficiencies and economies of scale.”
Investors are right to wonder if AppLovin is biting off more than it can chew, especially since it could be too much too soon. Unity Software recently completed an all-stock deal to merge with the app development platform iron source (IS-10.04%) in a deal that valued the company at $4.4 billion.
Longtime investors know that any merger or acquisition involves risk, whether it’s overpaying or overpricing the target company, misjudging potential synergies, or potentially resulting from differences in corporate culture or management. Couldn’t deal with problems.
Rumors suggested that some Unity shareholders were unhappy with the IronSource acquisition, possibly leading to an offer from AppLovin.
Danny Vena has no position in any of the stocks mentioned. The Motley Fool has positions in Unity Software Inc. and is recommended. The Motley Fool has a disclosure policy.