By Ayushman Mukherjee, Junseok Choi, Matthew Liu, Amar Mian (Cambridge), Friedrich von Storch, Enrique Perez-Hernandez, Ties Oudmaijer (IE Business School)
Photo: Mario Gogh (Unsplash)
Overview of the deal
Acquirer: Adobe Inc
Total Transaction Size: $20bn
Closed date: Expected completion in H1 2023
Target advisor: Qatalyst Partners, Allen & Co.
Adobe, an American multinational computer software company with revenues of around $16bn in 2021, announced on the 15th of September the acquisition of Figma for $20bn, the biggest buyout of a privately-owned software start-up. Figma has a web-based collaborative platform for designs and brainstorming which is widely popular among tech firms including Airbnb, Zoom and Coinbase.
The price of the acquisition has surprised Adobe’s investors who drove down the company’s stock by 17% after the announcement. The investors see the purpose and strategy behind the transaction but do not understand why a company which was valued at $10bn in a private fundraising a year ago is now worth double. Furthermore, Adobe said Figma’s ARR (annual recurring revenue) is $400mn which is a small portion of Adobe’s ARR which currently stands at $14bn. Hence, investors question why Adobe is paying 11% of its market value for only approximately 2.8% more ARR.
“Adobe’s greatness has been rooted in our ability to create new categories and deliver cutting-edge technologies through organic innovation and inorganic acquisitions. The combination of Adobe and Figma is transformational and will accelerate our vision for collaborative creativity.” Adobe Chairman and CEO Shantanu Narayen
Company Details (Acquirer - Adobe Inc.)
Adobe Inc. is a diversified software company headquartered in San Jose, California. Founded in 1982 by Charles Geschke and John Warnock, the company operates through three main segments: Digital Media, Digital Experiences and Publishing and Advertising. Having its origins in publication and creation software, the firm now offers a wide range of software solutions to its clients, including its flagship products Adobe Photoshop, Adobe Illustrator, Adobe Acrobat Reader and the Adobe Creative Cloud. The company has a global footprint and employs more than 28,000 people across offices on 6 continents. Adobe went public on the NASDAQ in 1986 and trades under the stock ticker “ADBE”.
Founded in 1982, headquartered in San Jose, California
CEO: Shantanu Narayen
Number of employees: 28,000
Market Cap: $134.25bn (as of 07/10/2022)
LTM Revenue: $17.19bn
LTM EBITDA: $6.91bn
LTM EV/Revenue: 7.74x
LTM EV/EBITDA: 19.27x
Company Details (Target - Figma)
Founded in 2012 by Dylan Field and Evan Wallace, Figma is a leading cloud-based collaborative UI/UX design tool SaaS provider headquartered in the U.S. It is backed by three major VC shareholders – Index Ventures, Greylock Partners and Kleiner Perkins – all of whom took part in Figma’s earliest investment rounds. Under its objective to create a widely accessible creative online designing space, Figma has launched many successful design platforms such as Figma Community and FigJam.
Founded in 2012, headquartered in San Francisco, California
CEO: Dylan Field
Number of employees: 350
Market Cap: Privately held
EV: $10B+ (post-money valuation as of June 24 2021, according to PrivCo)
2022 Annualised Recurring Revenue: $400M+
Projections and Assumptions
Adobe’s acquisition of Figma will be by far the largest deal that Adobe has made since that of software maker Marketo for $4.75bn in 2018. A LinkedIn post from Adobe’s Chief Product Officer, Scott Belsky, and a blog post from Figma’s Co-Founder & CEO, Dylan Field, mentioned the plans for Figma to continue operating autonomously. This means there are no plans to bring Figma inside of Creative Cloud and no changes in pricing. The partnership will give Figma users access to Adobe’s photography, illustration, and video technology in one place, while Figma in return can offer its deep expertise in building the browser with its collaborative tools. Once again, Adobe will expand its widely used portfolio of creative apps.
The deal has sparked investor concerns about the excessive price that led to Adobe’s stock dropping 18% in a single day. The company lost more market cap, with approximately $30 billion, than what it will pay for Figma. To put it into perspective, Figma is expected to generate $400mn in ARR in 2022. So, Adobe is paying around 50x 2022 ARR. On the other hand, Adobe will be taking a major competitor off the market and bringing it under its own umbrella. The deal is expected to close in H1 2023, subject to regulatory approvals.
The strategic rationale behind the acquisition of Figma is twofold. First is the consolidation of Adobe’s cloud software technology, with Figma’s web-based multi-player capabilities allowing for the delivery of Adobe’s Creative Cloud technologies on browsers, and the expansion of multi-user collaboration. Second is the acquisition of a huge market share – almost 4 million users – and the liquidation of competitive threats to its flagship UX design product, Adobe XD. These new users are also predominantly non-enterprise/less-technical, a market Adobe has left historically untapped.
The deal is expected to lower margins by 100-200 bps over the next two years. However, fundamentals remain strong: Adobe expects the deal to be accretive to its earnings three years after its completion (FY26), as Figma’s total addressable market is expected to grow to $16.5 billion across design, whiteboarding, and collaboration. By next year, Adobe will have an almost 70% market share of the global collaborative design software industry – with an estimated CAGR of 9.5% to 2030. We expect the broader secular tailwinds in digital content creation and a continued shift to the cloud to remain intact.
Risks and Uncertainties
1. Adobe may have overpaid in its acquisition of Figma. Adobe offered 40x Figma’s current annual revenue run rate. This is one of the largest start-up acquisitions ever, similar to Facebook’s $19bn acquisition of WhatsApp.
2. There are speculators’ fears of anticompetitive practices through this acquisition. There are fears that Lina Khan’s Federal Trade Commission will block the deal as the FTC has been intervening in blocking much smaller and less significant deals. The FTC has been responsible in blocking Meta’s acquisition of the VR fitness app, Supernatural, in July. They also sued to block Nvidia from acquiring Arm in November, which is now no longer occurring. However, the design aspects of Figma are vastly different to those of Adobe’s own design software, Adobe XD, so this may not pose a risk to the deal.
3. Even with the acquisition of Figma, Adobe may still not be able to compete in this industry. There already exists companies such as Canva which pose a more long-term threat to Adobe. Canva has 75 million users currently, whilst Figma only has 4 million users. Although Figma’s users include big tech companies such as Dropbox, Rakuten, Slack, Twitter and Volvo, Canva boasts better functionality than Figma. Canva is used more in graphic design related to social media. As well as being easier to use, Canva appeals more to the masses, whereas Figma requires a lot more technical skill, but can be used more widely. This introduces long-term risks in specific industries where Figma may have less functionality and may not be able to compete with more innovative software.
4. Adobe has no long-term business model in place for Figma. Adobe's current plan is to use Figma to replace Adobe’s own software, Adobe XD. Competing developers have mixed views on the acquisition stating that it may lead to less innovation in the graphic design industry. “Any developers in that community being acquired by Adobe will likely be stifled, as their objectives are realigned to what’s good for Adobe. Ultimately that can only reduce the choice available for creatives,” said Ashley Hewson, managing director of Affinity developer Serif, in an emailed statement. In the long term, price may increase while the product itself stagnates, and a new competitor will arise and Figma will become like Adobe XD.
5. It may be more cost effective for Adobe to invest in R&D in the creative design space instead of its acquisition of Figma. Adobe introducing more user friendly and original features into Adobe XD to compete with the market will be better in the long term.