(Add background and analyst quotes)
By Nivedita Balu, Krystal Hu and Eva Mathews
Aug 15 (Reuters) - Gaming software maker Unity Software Inc on Monday rejected AppLovin Corp's $17.54 billion takeover offer and said it would go ahead with its planned purchase of ironSource.
AppLovin, which competes with ironSource in helping developers grow and monetize their apps, offered to buy Unity in an all-stock deal last week on the condition that it drops the $4.4 billion bid for Tel Aviv-based ironSource..
Unity said on Monday AppLovin's offer was not in the best interest of shareholders and decided it would not qualify as a "Superior Proposal" as defined in Unity's merger agreement with ironSource.
Shares of Unity, whose platform has been used to build some of the most-played games such as "Call of Duty: Mobile" and "Pokemon Go", were down about 6.8% in morning trading, while those of ironSource surged about 13.4%.
"I would think that Unity would at least want a higher offer," Jonathan Kees, analyst at Daiwa Capital Markets said. Kees noted last week that AppLovin's offer was a hasty response to prevent two peers from combining.
After evaluating the proposed offer from AppLovin, which would give Unity 55% of the combined company's outstanding shares and 49% of the voting rights, Unity and its advisors decided the economics of such a combination is not in the best interest of shareholders and believed owning ironSource could help balance its businesses without over investing in adtech, sources familiar with the matter said.
"The AppLovin offer results in greater synergies and results in a lower pro forma multiple, but we believe the ironSource transaction results in lower dilution in Unity’s game engine," Jason Bazinet, analyst at Citi wrote in a note to clients on Sunday.
IronSource said it was committed to completing the deal with Unity as it would create "superior value for shareholders, customers, and employees".
Unity and ironSource expect the deal to close in the fourth quarter after gaining approval from shareholders.
AppLovin was not immediately available for comment. The company's stock was down over 6% in morning trading on Monday. (Reporting by Nivedita Balu and Eva Mathews in Bengaluru and Krystal Hu in New York; Editing by Anil D'Silva, Shinjini Ganguli and Marguerita Choy)