That quote comes courtesy of Vin Diesel’s Riddick character and is directed towards a particularly obnoxious bounty hunter, but in this case it could just as easily have been addressed to John Riccitiello, former CEO of Unity Software (U).
The Dilemma
Back in August 2022, Mr. Riccitiello was facing something of a dilemma; a month earlier, on July 13th, Unity Software had announced the planned “transformative combination” with publicly traded Israeli ad and tools developer ironSource (IS). Unity Software itself makes a dominant set of tools that game developers use to create and monetize content in the mobile game space, so the idea of adding additional monetization capabilities and tools to their arsenal appeared to make a lot of sense. The $4.4B acquisition (later reduced to $2.9B) was going to be “highly accretive” and would create an “end-to-end platform synergy from the combination of the companies will enhance Unity’s offerings for creators of all sizes.” That last quote doesn’t read particularly well, but it certainly sounds exciting!
Then along comes August 9th when ironSource competitor AppLovin (APP) decided to jump into the mix by making an unsolicited $17.5B offer for Unity Software in a so-called “merger of equals,” but with the stipulation that they drop their bid for ironSource. While the announced ironSource combination would leave Unity shareholders with about 75% of the combined company, the combination with AppLovin would leave them with somewhere around 55% of the equity (but only 49% of the voting power), but of a much larger company given AppLovin’s roughly 3x relative size compared to ironSource.
So the dilemma Mr. Riccitiello faced was: do you keep your cushy CEO job and control 100% of the combined company, or do you cash out and head for the exits and leave shareholders with 55% of an even more dominant company?
What’s a CEO to do?
Factors to Consider
The ironSource acquisition was basically cursed right from the start, with both companies having lowered FY2022 revenue expectations soon after announcing Q1 results. Negotiating a deal from a point of weakness sends a horrible message to investors, but failing to walk away as the situation continued to deteriorate (thus the lower price) would send an even worse message.
When announcing Q1 results in May, ironSource lowered their expected FY2022 revenues by around $40M to $765M.
In the press release announcing the ironSource deal Unity Software lowered their own forecast by $85M to around $1,325M.
Another factor to consider was the management team over at Unity. John Riccitiello wasn’t just some figurehead CEO hired by the founders to lead the company through the IPO process. John Riccitiello was the former CEO of video game giant Electronic Arts (EA) and a co-founder of silicon valley venture capital giant Elevation Partners, not exactly someone you just casually push to the side. Though he certainly had a long list of both supporters and detractors, John Riccitiello was a rock-star caliber CEO and the idea of selling out during what was expected to be only a slight downtick in business must have been anathema to him.
When ego’s get involved people tend to make rather poor decisions, so it shouldn’t come as a big surprise that a week after receiving the offer, the board voted unanimously to reject it.
The Aftermath
John Riccitiello, despite his rock-star status, would soon be forced out of his position as CEO over a dispute within the developer community, and the former RedHat CEO James Whitehurst would be installed in his place.
Though it’s tough to decisively assert with any confidence the results of an APP and U combination, the following chart appears to show (the start date isn’t accurate, but you get the picture) that Mr. Riccitiello and the board of Unity Software should indeed have taken the money.
Now let’s take a look at what came next…