(Bloomberg) – Adobe Inc. has agreed to buy software design startup Figma Inc. in a deal valued at around $20 billion to help it develop tools for creative professionals.
The deal announced by Adobe, which is half cash and half stock, confirms an earlier Bloomberg report and would mark the largest-ever takeover of a private software company, according to data compiled by Bloomberg. Adobe shares fell 13% at the market open in New York, the biggest drop in more than two years.
Figma, which lets customers collaborate on software as they build it, has seen demand surge during the pandemic as more people work remotely. The company has expanded its customer base in recent years, from software developers to big companies like Airbnb Inc., Google, Herman Miller and Kimberly-Clark Corp. – to also include people creating light games, cards and presentations. It also attracted a loyal student following.
This combination benefits “literally anyone who is a knowledge worker,” Adobe CEO Shantanu Narayen said in an interview.
Adobe, which had been a Wall Street favorite for more than a decade, has been hit by the tech downturn, seeing its shares lose more than a third of their value since the start of the year. Investors have grown increasingly skeptical of the dominance of Adobe’s line of software for design professionals, which accounts for about 60% of its revenue. The company has targeted more accessible web offerings such as Photoshop Express to sell its creative software to consumers, small businesses and social media influencers. The initiative has faced friction from upstarts such as Figma, Lightricks Ltd. and Canva Inc.
Figma, based in San Francisco, was co-founded a decade ago by Dylan Field and Evan Wallace. The startup introduced browser-based software design tools that allow software designers to work together in real time, bypassing the sometimes clumsy process of saving and sending their work to collaborators using of a collection of disparate applications. The company was valued at $10 billion in its last funding round a year ago. Figma’s backers include venture capital firms Kleiner Perkins, Index Ventures and Greylock Partners.
The deal’s “very high” valuation is likely weighing on Adobe shares, Bloomberg Intelligence’s Anurag Rana said. But Adobe defended its business strategy.
“We’re confident that if you look at it long term, it’s going to be great value for their shareholders and our shareholders as well,” Narayen said. The transaction is expected to close in 2023, pending regulatory and other approvals, Adobe said. Post-closing, Field will continue to lead the Figma team, reporting to David Wadhwani, president of Adobe’s digital media business. Figma will continue to exist as a standalone product.
Adobe also announced its third quarter results, with revenue up 13% to $4.43 billion. That was in line with analysts’ estimates, but it was the third consecutive quarter of growth below 15%, as Adobe was buffeted by economic uncertainty and the strong dollar overseas. Adjusted earnings per share were $3.40, better than Wall Street expected.
Figma will have a total addressable market of $16.5 billion by 2025, according to the release. The company is expected to add approximately $200 million in new net annual recurring revenue this year, surpassing $400 million in total annual recurring revenue by the end of 2022, with net dollar retention greater than 150%, said Adobe in an investor presentation. Figma has gross margins of around 90% and around 850 employees, Adobe said. The transaction is expected to be accretive to Adobe’s adjusted earnings per share at the end of the third year.
Under the terms of the agreement, approximately 6 million additional restricted stock units will be granted to the CEO and employees of Figma, which will vest over four years after closing. Adobe expects the cash consideration to be funded by cash on hand and, if necessary, a term loan.
Qatalyst Partners advised Figma with law firm Fenwick & West while Allen & Co. advised Adobe with Wachtell, Lipton, Rosen & Katz.
The agreement includes a termination fee of $1 billion in cash.
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