Thoughts on Adobe Acquisition of Figma
From this week's Sunday Newsletter which you can subscribe to for free: https://chitchatmoney.substack.com/p/sunday-finds-3-thoughts-from-last-c7e

The biggest news across the investing landscape was the announcement that Adobe intends to acquire start-up competitor Figma for a whopping $20 billion. Here are the details of the transaction:

> Under the definitive agreement, Adobe has agreed to acquire Figma for approximately $20 billion, comprised of approximately half cash and half stock, subject to customary adjustments. Approximately 6 million additional restricted stock units will be granted to Figma’s CEO and employees that will vest over four years subsequent to closing.

So this is a $20 billion deal plus some other dilution coming in the near future. According to Adobe’s press release, Figma is on track to do $400 million in annual recurring revenue (ARR) this year. From the wording, it looks like the business is growing ARR by 100% year-over-year.

I’m going to be honest, I have no idea what Figma does outside the fact that it is an Adobe competitor. But 50x forward sales (not including the granted RSUs!) is an extreme price to pay.
Unless Figma can continue growing at a high double-digit rate for a decade and achieve 30%+ cash flow margins, this acquisition will go down as a stain on Adobe’s history and a gift to the venture capital industry.

Maybe Figma will add that much to Adobe’s business and is that special of a product, but the likelihood of it generating shareholder value vs. the $20 billion price tag is low.

Remember the rationales thrown around the Square acquisition of Afterpay? Afterpay was growing at 100% year-over-year and Square acquired it at 40x sales because of the “synergies” and additions it could make to Square’s ecosystem. The potential of the acquisition has not materialized. Yes, it was a larger portion of Square’s market cap and was almost a merger, but the analogy fits nonetheless.

(Here’s the Square/Afterpay investor presentation, for reference. Looks promising for shareholders!)

How many years of free cash flow did Adobe management just give up to acquire this competitor at 50x sales? With $7 billion in trailing free cash flow, probably around three. I wouldn’t be surprised if the stock is dead money for three years based on the price before the acquisition was announced (~$375 a share) because of this.

Leandro's avatar
This acquisition should not be looked at only from a financial perspective imho. There’s little doubt that based on the financials it was crazy expensive but…how much are an additional 5-10 years of additional compounding worth?

With Figma, Adobe is not only buying an asset but a collaborative tool on the web that it can apply to the rest of its products. Missing it would’ve left Adobe in a terrible position in the creative industry. Overpaying was no doubt caused by management’s complacency, but still soon to tell if this will play out good or bad. Square’s acquisition of Afterpay only has in common the high price tag, but not much more imo
Brett Schafer's avatar
@invesquotes I guess we'll know for sure five years from now, I just think the price makes it extremely hard for this to work out. The acquisition needs to eventually materialize ~$2 billion in annual free cash flow for Adobe for this to make sense, which feels like many, many years away. Happy to be wrong though and I don't know much about Figma
Leandro's avatar
@ccm_brett will be difficult to judge though because Adobe will benefit outside of Figma so hard to know what portion of FCF growth will come from Figma. Probably works in a longer time frame
Phil Z's avatar
Agree with Leandro, the issue is that Adobe is now mostly watched / investors by value investors who will tend to focus a bit too much on recent financials and cash flows when it is also very much about future product development / innovation to stay relevant. Figma is an amazing product for designers collaboration. If Adobe is able to move its suite progressively to the Figma collaboration platform, we are looking at a monster company that one can only value using venture capital valuation methods. A value investor nightmare 😁
Brett Schafer's avatar
@philippez Whether you are a VC or a value investor the price you pay matters
Phil Z's avatar
@ccm_brett very true but method to estimate fair price can be different. VC / growth investors might see more upside from the size of a market opportunity vs projecting free cash flow growth based historical data and conservative assumptions. VC / growth investors / tech companies management might sometimes be overly optimistic but it’s not always the case. Examples of great acquisitions that looked crazy expensive: Instagram, YouTube

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