The word that Adobe acquired Figma for $20 billion has already spread far and wide, and with it, the news of a massive hit to Adobe stocks.
While the plummeting value of stocks is in direct correlation with the latest acquisition, current macroeconomic circumstances seem to be the main culprit behind such a devastating drop.
Adobe will finance half of the acquisition cost with cash, and the other half in stocks. In addition to that, it will provide Figma CEO Dylan Field and his employees with six million additional restricted stock units that will vest over a period of four years after the deal closes in 2023.
That is, if everything goes smoothly, seeing as how the deal is still subject to regulatory clearances.
Adobe Stocks Begin to Decline
Post-announcement, Adobe stocks were dealt a serious blow, dropping by 24% through Friday, and an additional 1.7% by Wednesday the following week.
Both Wells Fargo and Edward Jones downgraded shares of Adobe, citing the acquisition of Figma as the main reason.
The latest acquisition has left many wondering why Adobe was willing to spend $20 billion on a startup with $400 million in current-year revenues.
Adobe paid 50 times current revenues at a time when most other companies in the industry acquire assets for 10 times revenues at most.
Adobe's Earning Report Spells Trouble
This purchase comes at a time when Adobe’s growth is slowing down.
Last year, Adobe reported a sales growth of 23%, while the first three quarters of this year have seen that growth drop to only 12%.
The Q3 earnings report that coincided with the announcement of the acquisition, showed revenues of $4.43 billion for Adobe, expected to reach $4.52 billion in the next quarter. A mild increase considering Adobe’s ambitious plans.
It seems Adobe is currently in no position to make acquisitions of such magnitude, especially considering that the $20 billion price is equivalent to one-seventh of Adobe's own market capitalization.
In addition to that, Adobe might have to borrow the $10 billion it needs to pay in cash.
Yet, the company has decided to go ahead with the purchase, suggesting much grander plans beyond the obvious.
Figma is a perfect “strategic fit” for Adobe, but it’s highly unlikely that alone would merit such a high buying price.
Adobe Plays the Long Game
There seem to be two main reasons for such a risqué acquisition given uncertain macroeconomic conditions, where companies dare purchase only those prospects that have short-term potential.
Figma certainly isn’t one of them.
The current valuation of Figma is $10 billion, poised to reach $16.5 billion by 2025.
While it isn’t a short-term return on investment, Figma is a fast-scaling business with top net dollar retention of greater than 150 percent, which is one of the reasons for the acquisition.
The other reason appears to be of a more competitive nature.
Apparently, Adobe wasn’t the only business with its eyes set on Figma.
According to Nasdaq, there were other companies bidding against Adobe over Figma. This should silence most claims suggesting market elimination is at play, as it would give Adobe justification to move in on Figma, and to do so fast.
The market is a volatile place and has little understanding for long-term investments such as this one, so it’s probable that Adobe stocks won’t recover soon.
But in the long run, Adobe has armed itself with an efficient, high-growth business, that is the very symbol of the fast-changing nature of the software industry.