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Adobe Inc. agreed to buy startup Figma Inc. about $20 billion in software design to expand tools for creative professionals.
The deal announced by Adobe, which is a combination of half cash and half stock, confirms an earlier Bloomberg report and would mark the largest takeover of a private software company to date, according to data compiled by Bloomberg. Adobe shares fell about 9% in premarket trading.
Figma, which allows customers to collaborate on software while creating it, has seen a spike in demand during the pandemic as more people work remotely. The company has expanded its customer base in recent years from software designers at major companies such as Airbnb Inc., Google, Herman Miller and Kimberly-Clark Corp. – to also include individuals who create light games, maps and presentations. This also attracted loyal students.
The combination benefits “literally anyone who is a knowledge worker,” Adobe CEO Shantanu Narayen said in an interview.
Adobe, a Wall Street favorite for more than a decade, has been hit by the tech downturn, and its stock has lost more than a third of its value since the start of the year. Investors are increasingly skeptical about the dominance of Adobe’s line of software for design professionals, which accounts for about 60% of its revenue. The company focused on more affordable web offerings like Photoshop Express to market its creative software to consumers, small businesses, and social media influencers. The initiative has encountered friction from newcomers including Figma, Lightricks Ltd. and Canva Inc.
Based in San Francisco, Figma was co-founded by Dylan Field and Evan Wallace about a decade ago. The startup introduced browser-based software design tools that allow software designers to collaborate in real-time, bypassing the sometimes clumsy process of saving and sending their work to collaborators using 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 to weigh on Adobe shares, Bloomberg Intelligence’s Anurag Rana said. But Adobe defended its business strategy.
“We believe that if you look at it over the long term, it will be a great value for their shareholders and our shareholders,” Narayen said. The transaction is expected to close in 2023, pending regulatory and other approvals, Adobe said. After the closing, Field will continue to lead the Figma team and report to David Wadhwani, president of Adobe’s digital media business. Figma will continue to exist as a standalone product.
Adobe also reported third-quarter results where revenue jumped 13% to $4.43 billion. That was in line with analysts’ estimates, but marked the third straight quarter of growth of less than 15% as Adobe was hit by economic uncertainty and a strong overseas dollar. Adjusted earnings per share were $3.40, better than Wall Street expected.
According to the statement, Figma will have a total addressable market of $16.5 billion by 2025. The company is expected to add about $200 million in net new annual recurring revenue this year, surpassing $400 million in total annual recurring revenue by the end of 2022, with net retention of more than 150%, Adobe said in a presentation to investors. Figma has gross margins of about 90% and about 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 general agreement, Adobe expects the cash consideration to be financed with cash and, if necessary, a term loan.
Qatalyst Partners advised Figma along with law firm Fenwick & West, while Allen & Co. was a consultant to Adobe along with Wachtell, Lipton, Rosen & Katz.