AppLovin proposes merger with Unity Software to create a full-stack game development giant

Yesterday, AppLovin (NASDAQ:APP) — proposed a merger with Unity Software (NYSE:U) in an all-stock deal — valuing Unity at $20B.

What’s the big deal? Unity Software’s development tools help render 3D graphics — powering 50% of all video games. AppLovin helps developers grow and monetize their mobile apps.

Combined, the two could create a $35B gaming powerhouse with:

• A full stack of tools to help developers build, monetize and grow their games.
• Cost savings that’ll generate an extra $500-700M in adjusted earnings (EBITDA) within the next three years.

The end form: Unity Software shareholders would own 55% of the combined company but only 49% of the voting share.

• Unity’s CEO would become the combined company’s CEO.
• AppLovin’s CEO would become the combined company’s COO.

While Unity’s CEO will be at the helm, Unity shareholders will lose voting control. Unity’s stock would be converted into AppLovin’s Class A voting common stock and Class C non-voting common stock.Unity would also have to drop its plans to acquire IronSource (NYSE:IS).

What are the odds? $U closed yesterday, trading 14% below the $58.85 offer price — signaling that investors are skeptical a deal will happen.

Despite the deal making “a lot of business sense,” Unity is likely to reject the bid given that the offer price is “well below” Unity’s value per Wedbush Analyst Michael Pachter (SA).