Adobe’s $20 Billion Bid For Figma: A Deep Dive Into The Failed Acquisition And Its Implications For The Design Software Landscape

Despite not yet being able to compete with Adobe, the design powerhouse, Figma was predicted to add $200 million in net new APR in 2022. By 2025, Figma is predicted to increase its whole market share to $16.5 billion.

In the meantime, Adobe’s Q3 2022 revenue of $4.43 billion set a new record. The feature-rich Adobe XD product, which is most comparable to Figma, hasn’t been the company’s biggest source of revenue, though.

Revenues from Digital Media increased by almost 13% to exceed $3 billion, while Creative Cloud brought in about $2.63 billion. This year, Experience Cloud subscription revenues exceeded $981 million, while Document Cloud saw a 23% growth.

Why Did Adobe Want Figma?

Due to the market becoming diluted by new design tool generations, Adobe’s core business growth has been declining. Therefore, Adobe has a lot of reasons to think about purchasing the promising Figma.

Through this deal, Adobe could expand into a new market where they haven’t yet found success. Compared to Figma’s design product, Adobe XD has not gained as much traction, despite Adobe having put less development effort into it than they have into their other products.

Compared to Adobe, Figma’s UI/UX collaborative design tools provide a more sharing experience.

Strong profitability for Adobe is also guaranteed by the acquisition of Figma. Figma has some of the strongest figures in the industry, with a 90% gross profit margin and a 150% net dollar retention rate. Adobe may gain financially from this.

However, Adobe will also be able to invest more in creating new features, providing better customer service, and enhancing their business models as a whole thanks to the increased cash flow.

Moreover, Adobe has been exploring fresh approaches to grow its cloud platform. Until recently, a large number of Adobe’s tools were exclusively available as local applications. But, the purchase of Figma will position them to increase their market share even further given the strong demand from customers for web-based experiences.

Sheila Mahoutchian, senior analyst at Forrester, claimed that Adobe was “late to the game” in allowing fully functional, browser-based, real-time creative tools. Figma can aid in gap closure.

Additionally, Figma has already been incorporated into the tech stacks of businesses like Microsoft, Airbnb, Salesforce, Kimberly-Clark, and BP.

The Bid

For these reasons, Adobe has consented to pay $20 billion, comprising half equity and half cash, to purchase Figma. The CEO and staff of Figma will also receive an extra 6 million restricted stock units, which will vest over four years following the closing of the transaction.

The Termination

Now that the companies have formally acknowledged that regulatory rejection in Europe has forced them to suspend acquisition preparations, Adobe’s $20 billion mega-bid to purchase rival Figma is effectively dead.

Adobe and Figma mutually agreed to end the transaction, stating in a press release, “Even though both companies continue to believe in the merits and procompetitive benefits of the combination based on a joint assessment that there is no clear path to receive necessary regulatory approvals from the European Commission and the U.K. Competition and Markets Authority.”

The merger, which was first disclosed in September of last year, was always going to come under regulatory scrutiny because of its magnitude and the fact that it eliminated one of Adobe’s main competitors. The U.S. Department of Justice (DOJ) had been closely examining the deal for the better part of 2023, but it hadn’t filed a formal lawsuit to prevent the deal from going through. However, information about Adobe and Figma meeting with the DOJ in an attempt to avoid legal action surfaced before the weekend.

Whatever the result, the two businesses were already dealing with serious challenges in Europe.  In late November, the United Kingdom ruled that the proposed acquisition would “harm innovation,” and as a result, its competition authority would begin a thorough investigation. This decision was made in response to a similar decision made in the European Union (EU), which had earlier in August announced a similar course of action.

Effective competitor

The main argument for the concerns was that, even though the products of the two companies were not the same, Figma was the “clear market leader” for interactive product design tools and exerted a “constraining influence” over Adobe in the market for digital asset creation tools. As a result, the acquisition of Figma by Adobe would keep Figma from being a “effective competitor.”

Dylan Field, the CEO and co-founder of Figma, stated in a blog post today that they came to a “joint decision” after being unable to persuade regulators of the distinctions between their various businesses and products.

Although it’s not the result we had hoped for, we no longer see a route toward regulatory clearance of the merger, Field said, despite thousands of hours spent with regulators throughout the world outlining differences between our businesses, our products, and the markets we serve.

Because of everything, Adobe now owes Figma a $1 billion termination fee, which was supposed to be paid under the terms of the contract if the acquisition failed to close within 18 months after it was announced in September of last year or if regulatory clearance was not obtained.

The DOJ was also considering taking regulatory action, so in the end, it just made more sense to abandon the deal completely. “It is not unheard of to abandon a deal shortly before the final decision where a prohibition seems inevitable,” Tom Smith, a former CMA legal director and partner at London-based law firm Geradin Partners, told TechCrunch. “This avoids the merging parties having an adverse decision against them that could serve as a precedent. It also saves some legal fees, although that may be a more minor consideration in such a huge deal.”

We’ll go over a couple of my takeaways from the announcement and what’s coming up in this post.

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1. New Normal in terms of Startup Exits

Acquiring significant startups has grown more difficult in the current climate when M&As are subject to scrutiny.

Yes, Activision was acquired by Microsoft for $69 billion. However, in addition to this acquisition, we have witnessed problems with Visa’s acquisition of Plaid, Grails’ acquisition of Illumina, and even Meta’s acquisition of the gif keyboard software Giphy.

Regulators presumably believe that some acquisitions, like Instagram and WhatsApp, should never have happened in the first place and want to avoid similar situations in the future where a strategic buyer pays a high price to acquire a small or rapidly expanding competitor in the same market. Furthermore, any possible purchase that businesses like Google, Amazon, and Meta in particular make is subject to close examination.

In the startup world, the set of would-be acquirers is typically a short list of three to five strategics at some reasonable revenue scale ($50M+) or valuation threshold (~500M-1B+). If half or more of them cannot feel confident of a potential acquisition to close, that reduces, and in some cases may eliminate, the possibility of a meaningful exit via acquisition for that startup, depending on its scale.

Due to the drastically decreased likelihood of significant results from acquisition, this alters the playing field for both venture capitalists and startup founders. This makes it even more crucial for businesses that are getting close to size to begin planning their IPO route.

It emphasizes just how much potential devastation may lie ahead in a moment like this when we have over 1,000 unicorns on paper, but only a small percentage of them appear to be headed toward being a possible public business in three to five years.

2. The actual deal price would have been ~$30B

Retention compensation for Figma workers included 6 million restricted stock units (RSUs) in addition to the $20 billion cash and stock consideration for Adobe’s acquisition of Figma. Nevertheless, rather than being determined by the closure date, the quantity of Adobe stock units was set according to the announcement date of September 15, 2022. This implies that changes in Adobe’s price would have an impact on the actual consideration given to Figma shareholders.

Before the completion of the transaction, changes in the market price of Adobe common stock will not affect the fixed closing stock consideration per share. Consequently, from now until the mergers are completed, the consideration given to Figma stockholders in the deal will change in value. – SEC documentation

The share price of Adobe at the time of the announcement was $370. $10B in cash, $10B in Adobe stock, and $6 million in retention RSUs valued at $2.2 billion made up the entire consideration for Figma, which came to $22.2 billion.

Adobe’s stock price is currently up 60% to almost $600 per share. The entire consideration for Figma, if the transaction had closed today, would have been $29.6 billion, consisting of $10 billion in cash, $16 billion in Adobe stock, and 6 million RSUs valued at 3.6 billion.

The actual cost of acquiring Figma would have been 33% greater than projected due to the 60% increase in Adobe’s stock price.

Seemingly insignificant details like this could have a significant impact on the final consideration in a scenario where major acquisitions across industries will face increased scrutiny and lengthy approval periods (Adobe expected this Figma deal to close in 4 months, but it took 15 months before being terminated). This is because the acquirer’s stock price may change during this time.

3. The impact of the $1B termination fee

Adobe has agreed to pay Figma a $1 billion cash breakup fee as part of this settlement. This charge, which was included in the original acquisition agreement, served as a kind of window into Figma’s bargaining edge at the time as well as the perceived danger to the transaction closing.

Figma has raised $333 million in investment, thus the $1 billion breakup fee is over three times the total amount of money they have raised. According to the SEC filing, they will get this dilution-free capital in cash within the following three days.

A mutual termination agreement (the “Termination Agreement”) was signed on December 17, 2023, when the Company and Figma mutually decided to end the Merger Agreement. The Boards of Directors of Figma and the Company both approved the mutual termination of the Merger Agreement. Under the terms of the Termination Agreement, the Company shall pay Figma one billion dollars ($1,000,000,000) in cash (the “Termination Fee”) within three business days of the date of the Agreement.

To put the $1 billion in context, Figma, a company employing about 1400 people, could cover its operating costs for two to three years with just this amount, even without taking into account its revenue.

Even though the majority of purchased companies won’t be able to bargain for breakup fees, I anticipate that stronger-positioned enterprises with high scrutiny risks will pressure the acquirer more than in the past.

4. What it means for Figma

With almost $600 million in revenue, Figma has grown 40% year over year. When it was acquired, it was valued at about $400 million, with Adobe paying 50 times annual revenue retention of 150% and 100% year-over-year growth.

Given its outstanding metrics, a ~15–16x NTM ARR multiple wouldn’t be out of the ordinary. Assuming 25–30% growth NTM, you get at an Enterprise Value of ~$11–13B as of today, even though Figma wouldn’t be worth $20B (or $29.6B) at today’s multiples.

With its impressive metrics and stats, Figma is already among the most “IPO-ready” companies in the market. Figma can afford to stay private, concentrate on expansion, and schedule its IPO for a time when the market is favorable because of the $1 billion breakup fee and its cash flow profitability.

It’s also possible that they won’t require funding when they go public, thus choosing a direct listing is still an option.

They may be able to accomplish even more their thanks to this abandoned acquisition because they have a fantastic product, community, and brand!

5. What it means for Adobe

Figma was acquired by Adobe for 50x ARR in a completely different market. Not only has the market landscape evolved in the last eighteen months, but generative AI has also become popular and has the potential to drastically alter the way design is done.

Even though Adobe’s independent business model makes it vulnerable to competition from Figma, it still lags in terms of product and user experience design, and its offering isn’t as widely utilized and collaboratively within an organization as Figma’s (2/3 of its users aren’t designers). Nevertheless, Adobe has been making significant investments in GenAI and has been at the forefront of the industry’s efforts to incorporate GenAI into its products.

Using its more than $5 billion cash reserve, Adobe can reallocate its resources to speed up research and development of AI and collaborative web-based design interfaces, which could improve its core products. If they choose to develop a rival AI-native Figma, AI might also help shorten the time to R&D.

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**The primary author of this article is our staff writer, Sakshi John