Observations on the Adobe-Figma acquisition termination

Tanay Jaipuria
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The unraveling of Adobe's $20 billion bid for Figma offers key insights into the regulatory roadblocks facing Big Tech mergers. Read on to get an analysis of what happened, and what might come next for M&A.

The tech world was shocked when Adobe and Figma announced they were terminating their $20 billion acquisition agreement. This acquisition, which seemed like a done deal just months ago, fell apart due to regulatory concerns.

In this post, I’ll analyze the fallout from the collapsed deal. 

What does it mean for the companies involved, and what does it signal about the future of mergers and acquisitions (M&A) in the tech industry? 

We'll look at the real price of the acquisition, which would have been closer to $30 billion due to Adobe's rising stock price. We'll also examine the potential impact of the massive $1 billion breakup fee Figma will receive.

The new normal for startup exits

In today's environment, where M&As face intense scrutiny, acquiring large startups has become increasingly challenging.

Yes, Microsoft’s $69 billion acquisition of Activision did go through. However, we’ve seen issues with other deals, including Visa’s purchase of Plaid, Illumina’s acquisition of Grail and even Meta’s purchase of the gif keyboard app Giphy.

It seems clear that regulators feel in hindsight that certain acquisitions such as Instagram and WhatsApp shouldn’t have gone through, and intend on preventing future scenarios where a strategic acquirer is paying a large sum to buy a scaled or fast-growing player in the same space. In addition, companies like Google, Amazon and Meta in particular face intense scrutiny on every potential acquisition they make.

For the startup world, given that at some reasonable revenue scale (over $50 million) or valuation threshold ($500 million-$1 billion and up), the set of would-be acquirers is usually a short list of 3-5 strategic players. If half or more of them cannot feel confident of a potential acquisition, that reduces — and in some cases eliminates — the potential for a meaningful exit via acquisition for that startup, depending on its scale.

This changes the equation for both startup founders and venture capitalists by vastly reducing the potential for meaningful outcomes by acquisition, and makes it even more important that scaling companies start thinking about their path to IPO.

Today, there are over 1,000 unicorns on paper — but only a fraction of them appear to be on the path to becoming a public company in 3-5 years. This highlights just how much potential destruction may lie ahead.

The actual price of the deal would have been approximately $30 billion

Adobe’s acquisition of Figma was reported as a $20 billion consideration — half in cash and half in stock, plus 6 million Adobe restricted stock units (RSUs) in retention packages for Figma employees. 

However, the number of Adobe stock units was fixed based on the date of the deal announcement of September 15, 2022, not the closing date. This means the actual consideration received by Figma shareholders would vary based on fluctuations in Adobe’s price. The SEC filing stated:

“The per-share closing stock consideration is fixed and will not be adjusted for changes in the market price of Adobe common stock prior to the consummation of the transaction. Therefore, the value of the consideration to Figma stockholders in the transaction will fluctuate between now and the completion of the mergers.”

At the time of the announcement, Adobe stock was at $370 a share. The total consideration for Figma was $10 billion in cash, $10 billion in Adobe stock and 6 million retention RSUs worth $2.2 billion, for a total of $22.2 billion.

Today, Adobe’s stock price is at approximately $600/share, up 60%. If the acquisition had gone through at this time, the total consideration for Figma would have been $10 billion in cash, $16 billion in Adobe stock and 6 million RSUs of Adobe worth $3.6 billion, for a total price of $29.6 billion. 

With Adobe’s stock price soaring by 60%, the final cost for acquiring Figma would have been 33% higher than originally estimated.

In our current business ecosystem, where major acquisitions across industries will face increased scrutiny and long approval periods — Adobe anticipated this Figma deal closing in four months, but instead, it took 15 months before being terminated — details like this could end up affecting the final consideration significantly, given the potential change in the acquirer’s stock price in the period before closing.

The impact of the $1 billion termination fee

As part of the termination of this deal, Adobe will pay Figma a $1 billion breakup fee in cash. This fee was set as part of the initial acquisition agreement, and in some ways, it highlighted Figma’s bargaining position at the time and the perception of potential risk to the acquisition.

To date, Figma has attracted $333 million in funding, so the $1 billion breakup fee is nearly triple their total raised capital. The company apparently received this dilution-free payment in cash three days after the SEC filing.

“On December 17, 2023, the Company and Figma mutually agreed to terminate the Merger Agreement and entered into a mutual termination agreement effective as of such date (the “Termination Agreement”). The mutual termination of the Merger Agreement was approved by the Company’s and Figma’s respective Boards of Directors. In accordance with the terms of the Termination Agreement, the Company will make a cash payment to Figma in the previously agreed amount of one billion dollars ($1,000,000,000) (the “Termination Fee”) within three business days following the date thereof …”

Putting the $1 billion in perspective: For Figma, a company with around 1,400 employees, this termination fee alone could sustain 2-3 years of operating expenses.

While most companies being acquired will not be in a position to negotiate termination fees like this one, I expect the ones in strong positions (and where risks of scrutiny are high) will push acquirers on breakup fees more so than in the past.

What the deal termination means for Figma

Figma wrapped up 2023 at approximately $600 million in revenue, and the company grew 40% year over year. At the time of acquisition, it was at $400 million with 150% in net dollar retention growing 100% year over year, with Adobe paying 50x their annual recurring revenue (ARR).

While Figma wouldn’t be worth $20 billion (or $29.6 billion) at today’s multiples, given its strong metrics, a 15-16 times ARR for the next 12 months (NTM) multiple wouldn’t be crazy. Assuming 25-30% growth NTM, you get to an enterprise value of approximately $11-13 billion today.

Figma is already one of the current market’s most “IPO-ready” companies, given its strong numbers and metrics. With the $1 billion breakup fee bolstering their finances, combined with their cash flow profitability, Figma has the luxury to remain private, focus on growth, and time their IPO for when market conditions are favorable.

Given that they may not need cash when they go public, I also wouldn’t rule out them opting for a direct listing.

They have a great product, community and brand, so it is very possible this abandoned acquisition will enable them to achieve even better things independently!

Adobe at a crossroads

Adobe’s acquisition of Figma was priced at 50x ARR in a very different market environment. In the interim 18 months, not only has the market changed, but generative AI (GenAI) has taken off, which promises to significantly change how design works.

Adobe will still face the competitive threat of Figma as an independent company and it remains weaker when it comes to product and UX design. Adobe’s offering isn’t used as collaboratively as Figma’s, and their audience within companies is not as wide (two-thirds of its users are non-designers). However, Adobe has been investing in GenAI heavily, and has been one of the companies leading the charge in terms of integrating GenAI into its products.

Adobe can redirect its resources, leveraging its $5 billion cash reserve to accelerate research and development in collaborative web-based design interfaces and AI that can make their core products better. AI could also help accelerate the time to research and development of an AI-native Figma competitor if they decide to build one.

Adobe-Figma breakup shows challenges ahead for Big Tech deals

The unraveling of Adobe's acquisition of Figma is a sign of the times. With increased antitrust scrutiny, tech giants will struggle to push large M&A deals through and will have to reconsider their acquisition strategies.

Meanwhile, the terminated deal may empower Figma to achieve even more as a company standing on its own — and it serves as a warning that securing regulatory approval for Big Tech deals is becoming increasingly difficult in today's antitrust environment.

To get my up-to-date analyses of M&A and other trends shaping the tech and business worlds, subscribe to my Substack.

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