A software developer that builds the scaffolding for many popular video games is the latest target of this year's gaming M&A gold rush.
Unity Software Inc. showed no love for an unsolicited merger offer from mobile app-monetization company AppLovin Corp. Given a growing industrywide interest in video-game advertising, analysts expect this may not be the last unsolicited offer to tempt Unity's management.
"After the year-long M&A craze in the games industry, there are not many companies of Unity's caliber left, so you can bet that it is on the target list of potential acquirers," said Serkan Toto, CEO of game consultancy firm Kantan Games.
At the moment, Unity is in the middle of a pending merger with ironSource Ltd., which directly competes with AppLovin. The deal, which values Tel Aviv-based ironSource at about $4.40 billion, is designed to help Unity expand its in-app monetization tools for mobile game developers. IronSource operates a platform that provides advertising, cross-channel marketing and distribution tools for mobile developers.
AppLovin's takeover offer, which valued Unity at about $17.54 billion, was conditional upon Unity abandoning the ironSource deal. Analysts say the offer also undervalued Unity based on its internal estimations.
"The offer put Unity's share value at around $50 when the company itself valued its shares at about $80 for the ironSource deal," said Joost van Dreunen, a lecturer on the business of games at the New York University Stern School of Business. Shares of Unity closed at $48.89 on Aug. 25.
In-game advertising
Gaming revenue is stagnating amid macroeconomic pressures and a drought of compelling experiences, so some companies may see advertising as a way to offset soft content revenues, said Neil Barbour, an analyst at Kagan, a media research group within S&P Global Market Intelligence.
"Advertising in gaming has been largely additive to the core revenue drivers of retail and in-game purchases, but there's a sense in the industry that not every stone has been overturned and that there is a path to substantive growth for in-game advertising," said Barbour.
Unity has struggled with some of its own integrated ad solutions for developers. Shares of the company plunged in May after Unity acknowledged a flaw in its Audience PinPointer tool that enables game developers to monetize ads by targeting specific users for their games. Unity has leaned heavily on this tool following Apple Inc.'s privacy policy changes that allowed users to disable ad tracking.
Shares of Unity closed at an all-time low of $30.30 on May 11 after the company disclosed the issue. The stock has underperformed the tech-heavy Nasdaq index for the year to date.
"In the long term, the recent activity in this space underscores the momentum behind advertising becoming a viable revenue model in gaming, as more content firms look to diversify their revenue mix," van Dreunen said.
Potential suitors
This year is setting new records in gaming M&A. Gross transaction value for the industry surpassed $102 billion in June, according to analysis by Kagan.
"The overall rush of M&A in 2022 reflects the industry's status as a revenue powerhouse as well as one of emerging growth opportunities," said Barbour.
Unity, whose game engine powers a wide range of popular games, such as Call of Duty: Mobile and Pokémon Go, could be an ideal target for Big Tech to make a serious play in the industry, said Kantan's Toto.
"Over the years, Unity has become one of the biggest names in gaming," Toto said. "On paper, a deal with companies that still want to break into gaming such as Amazon or Google would make a lot of sense."
Big Tech firms including Amazon.com Inc., Alphabet Inc. and Netflix Inc. are slowly expanding their respective gaming offerings, though these companies have yet to make any significant gaming acquisitions.
Microsoft Corp., which is in the process of closing its record $79.60 billion purchase of Activision Blizzard Inc., could be a suitable candidate to snap up Unity, particularly if its Activision deal fails to win regulatory approval, said John Freeman, vice president of equity research at CFRA.
"The size and scope of the Activision deal has put Microsoft in regulatory crosshairs that are typically aimed at other Big Tech firms," Freeman said. "If this deal does not get the necessary approval in the end, Unity's game engine and mobile prowess could be welcome additions to their strategy."
Other targets
The Activision deal and Take-Two Interactive Software Inc.'s acquisition of Zynga leaves Electronic Arts Inc., Roblox Corp. and Take-Two as the largest public video game companies in the U.S., making all three potential targets — assuming would-be buyers can navigate the regulatory scrutiny that would come with such large transactions.
EA's shares jumped more than 4% in early trading Aug. 26 following an unconfirmed report that Amazon was planning to make a bid for the publisher. A spokesperson for Amazon declined to comment on the speculation, while EA did not respond to a request for comment by S&P Global Market Intelligence.
"Right now, it seems like most companies with ambitions in the gaming space are looking for content and developers," said Kagan's Barbour.
Both EA and Take-Two own licenses to sports games that could complicate negotiations for any potential deals. Meanwhile, Roblox, with its online game platform and creation engine, has a large captive audience that has the potential to grow into new markets, said Barbour.
"An acquirer could feel they are getting good value now that Roblox's stock has dropped from its 2021 highs," Barbour said.