Unity (U) Stock Drops on $4.4 Billion IronSource Acquisition News

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In a deal valued at $4.4 billion, Unity Software (NYSE:U) has announced a merger agreement with IronSource (NYSE:IS). So far, the market’s reactions have been positive for IS stock, but negative for U stock.

Unity provides a platform for creating and operating interactive, real-time 3D content. In contrast, IronSource’s platform enables developers to turn their apps into successful, scalable businesses. The two companies aren’t exactly the same, but combining their resources could yield a powerful competitor in the software development space.

Unity is definitely the bigger company of the two. Therefore, it makes sense that IronSource will become a wholly owned subsidiary of Unity Software in this merger. It will be an all-stock transaction in which IronSource is valued at approximately $4.4 billion.

Unity Software CEO John Riccitiello touted the benefits of this merger, asserting that it “better supports creators of all sizes by giving them all the tools they need to create and grow successful apps in gaming and other consumer-facing verticals like e-commerce.”

Why Is U Stock Falling?

This merger could prove to be, literally and figuratively, game-changing in the digital content creation space. After all, it’s expected to deliver a run rate of $1 billion in adjusted earnings before interest, taxes, depreciation, and amortization (EBITDA) by the end of 2024. Plus, the combined company is forecast to provide $300 million in annual EBITDA synergies by year three.

So, it might confuse and frustrate U stock holders to see that the share price slumped 14% this morning. At the same time, IS stock surged 49%.

This is actually a typical initial market response, in which an acquiring company’s stock goes down while the acquired company’s stock goes up. Most likely, traders are focusing on the benefits that IronSource will accrue as it gets access to Unity’s resources.

Unity Software’s shareholders, on the other hand, may be mulling over the company’s substantial cost to acquire IronSource. Indeed, Unity will have to demonstrate that IronSource is worth the $4.4 billion price tag. And if it is, then there may be substantial upside potential for U stock.

On the date of publication, David Moadel did not have (either directly or indirectly) any positions in the securities mentioned in this article. The opinions expressed in this article are those of the writer, subject to the InvestorPlace.com Publishing Guidelines.

David Moadel has provided compelling content – and crossed the occasional line – on behalf of Motley Fool, Crush the Street, Market Realist, TalkMarkets, TipRanks, Benzinga, and (of course) InvestorPlace.com. He also serves as the chief analyst and market researcher for Portfolio Wealth Global and hosts the popular financial YouTube channel Looking at the Markets.