Adobe gives up on Figma

Adobe has abandoned the proposed $20B acquisition of Figma and agreed to pay the $1B termination fee as stated in the agreement. For 15 months both companies had been trying to address multiple regulatory challenges, most notably by the European Commission and the UK’s Competition and Markets Authority.

“It’s not the outcome we had hoped for, but despite thousands of hours spent with regulators around the world detailing differences between our businesses, our products, and the markets we serve, we no longer see a path toward regulatory approval of the deal.” - Dylan Field, Co-Founder & CEO Figma

As implied by Dylan’s statement on the Figma blog, the main objection of the regulators is that the acquisition would create too much of a monopoly in the digital design, image editing and illustration markets. This is confirmed in statements from EU officials as well.

“By combining these two companies, the proposed acquisition would have terminated all current and prevented all future competition between them. Our in-depth investigation showed that this would lead to higer prices, reduced quality or less choice for customers.” - Margrethe Vestrager, EU Competition Commissioner

Who loses?

Adobe for sure. There is the $1B termination fee of course, but that isn’t the real loss. In an earlier post I’ve explained why the acquisition is strategic for Adobe. Creative Suite is the large incumbent in this market. Figma the disruptor. Adobe recognised the existential threat Figma can / has become to their heritage product line and their undisputed market position, and acted accordingly.

That is also exactly why regulators object to the transaction. More so than in the past, they intend to prevent scenarios where a strategic acquirer pays a large sum to buy a fast growing player in the same space. Big Tech companies in particular face intense scrutiny.

Figma’s founders and investors lose as well. Building a company is hard work and the risks are high. The whopping $20B valuation at a 50x multiple was a testament to how strong the company, brand and product they have built really are. Especially if you consider that half of the deal was to be paid in Adobe stock. That stock closed at $370/share at the time of the announcement, but is currently up by 60% at ~$600/share. So the real transaction value would be closer to $30B today.

Who wins?

The Figma community first of all. The community is a key contributor to Figma’s success. Its members fled to Figma as the product became a viable alternative for the stranglehold that Adobe’s Creative Suite had on the market. Their fear of Figma being assimilated into Creative Suite with all side effects is no longer relevant.

Despite the immediate loss for Figma’s founders and investors, the termination fee also creates opportunity. Figma has raised $333M in funding and scaled its business to ~$600M revenue with strong net dollar retention (2022: 150%) and gross profit margin (2022: +90%). It is a high growth business with a solid operational foundation. The termination fee nearly quadruples their capital without further dilution for existing investors.

“Putting the $1B in perspective: for Figma, a company with around 1400 employees, this amount alone could sustain 2-3 years of operating expenses, even without considering the company’s revenue.” - Tanay Jaipuria

Market reality is different today than it was 15 months ago and it is highly unlikely that Figma could negotiate similar multiples today. But Figma has the luxury of remaining private and focus on continued growth. Market conditions are not favorable for exits today, but when the tide changes they will be in an even stronger exit position - whether private or public (IPO).

Is it a total loss for Adobe?

Adobe hasn’t been able to acquire Figma. You have to ask yourself the question if it really still made sense though. The M&A market has changed significantly, with companies being valued much less than 15 months ago. Taking into account that the true cost of the deal had actually gone up, it became even more of a stretch.

An even bigger change comes from the rapid innovations on the Generative AI front. Generative AI promises to significantly change how digital design works. Adobe hasn’t been able to take out Figma as a competitor, but has invested heavily in Generative AI capabilities and integrated valuable capabilities based on the technology throughout its Creative Suite. Without the distraction of having to integrate Figma, and the confusion concerning the Creative Suite overlap and evolution, Adobe can accelerate its R&D investment into differentiating capabilities of its own.

Given the changed market conditions, technology evolution, and regulator pushback cutting losses and pulling out of the Figma deal was probably a smart decision.