Adobe's share price still hasn't recovered from falling by over $30bln after they announced the purchase of Figma for $20bln. At 50x annualised revenue, this is the highest revenue multiple ever paid for a scaled SAAS company, the largest sale of a private tech company ever and the second largest in SAAS history. What Adobe paid would have been shocking in a bull market, but today, it is stunning. I have always loved the leadership at Adobe, but the market clearly hates the deal, but why? I dig in to learn more and see what lessons the tech industry can learn.
Background
Adobe was reborn in the cloud in 2010 as they moved their product from physical CDs to the "Creative Cloud". It was not an easy transition but one that the company was very thoughtful about and executed deliberately over three years. The result? Once Wall Street figured out that Cloud was a much better business model (it took them 4 years to do so) The stock was a ten-bagger over next 5 years.
The move to the cloud in 2010 was a brilliant strategic move but was forced upon them by the stark reality of having no user base growth. They had been selling around three mln units of Photoshop each year and had seen almost no growth. After much careful deliberation, they decided to take the plunge and hoped that a move to the cloud would enable more people to experience Adobe for the first time. It worked, today they have about 23mln users. But it is worth bearing in mind that this wasn’t a strategic step that they did ahead of their time or whilst they still had a roaring business. It was a move that they had to make; either kill the golden goose or become Kodak.
Today, the company, in some ways, is facing a redux of 2010, slowing user base growth (although not ex-growth by any means), a transition to browser-based, collaborative software that seems to be eating the market underneath them (Canva) and around them (Figma). Adobe has tried and failed to launch products like XD, Indesign, Workfront and Frame.io to address this collaborative customer base with very little success. The product is too heavy and legacy. Put simply, Adobe may have been reborn in the cloud, but Figma is a native.
The problem that Figma has solved is allowing collaboration between coders and designers. In the past, designers were forced to use a combination of tools (a desktop app called Sketch plus a host of plug-ins) to allow what was essentially a picture with functionality to become an app/website. Actual files were being sent between parties, so version control was, well, out of control. In order to explain to the coders how apps were supposed to operate, you needed yet another plugin with arrows and text all over the place. All this resulted in lots of frustration, lost hours and miscommunication. to add to the complexity, the number of people that are now contributing to the design process has exploded. It now includes product managers, designers, UI UX, markets, data teams, backend and front-end engineers etc. The more people that need to contribute to the design process, the harder it is to handle. Along came Figma and put the whole process into a browser-based, real-time collaboration software that simply worked. Just how Adobe's move to the cloud allowed more people to contribute to the creative process, and Figma allowed more people to add to the design process.
Why do investors hate the deal?
Admission of failure - This is seen as an admission of failure by Adobe. They have tried to break into the collaboration market and realised they were losing.
Growth - Adobe's core product growth is slowing. Growth in creative cloud just dropped to 10% in this week’s results , and this purchase is an admission they are starting to run out of growth.
TAM - Figma admits that their TAM is only $16.5bln in 2025. Paying $20bln sounds expensive. People are questioning what the plan is to leverage Figma to expand their own business. This is very unclear.
Why else did Adobe panic?
One word, Microsoft. "Tens of thousands of designers, developers, data scientists and marketers at Microsoft use Figma's cloud-based design software."
To understand why this is a problem, you have to understand just how cosy Microsoft and Adobe have been. Adobe has relied on Microsoft for distribution, they have launched data sharing initiatives, Adobe is an Azure preferred partner, and the list goes on. The CEOs even went to the same high school in India! There was only one problem. Staff at Microsoft were designing Microsoft products using Figma, not Adobe XD. "The product has since become so central to how Microsoft's designers do their jobs that Jon Friedman, corporate vice president of design and research, said Figma is "like air and water for us." It's also used by engineers, marketers and data scientists across Microsoft". In fact, Microsoft actually worked with Figma to develop their top-tier enterprise plan. They weren't just a user; they were basically in product development.
When your biggest partner is married to you but spends all his spare time hanging out with a competitor, it is time to take notice.
Conclusion
Adobe has a huge hill to climb to convince investors that (a) they aren't ex-growth (b), but yet Figma is still an important part of their roadmap. By adding collaboration, they will expand their TAM further, just like they did when they moved from PC to cloud.
Do I believe it? Actually, I do buy it. Just looking at the recent results, Adobe has a huge growth problem which is why the stock is down so much. With roughly $18bln of sales growing at only 10%, the stock trades on 24x PE, 3x PEG and 15x EV/EBITDA. Bizarrely it's still expensive for the growth it offers. If Figma can add $1bln of sales by 2025 and bring growth back up to 15% or more, the market would have to believe that the growth is sustainable for it to trade up by $20bln that they paid.
Can Figma be much bigger than it is today? Yes, I can see the impact that Canva is having. Making people who weren't designers and hated doing PowerPoint into designers. If Adobe can really use Figma to reinvigorate growth and push out the perceived growth peak they will buy themselves time and potentially a new TAM to attack.. The stock today is trading at all-time lows, but given slowing growth, that is deserved.
Lessons for SAAS CEOs
The new technology that enabled Figma was OpenGL. It allowed software to be built into browsers which enabled collaboration. It was a distribution shift that was under-appreciated by the incumbents, just as SAAS was a distribution shift from CDs
Collaboration built into your software is not an option now. It's a must. Companies need to evolve their DNA.
There is no better M&A banker than your customer. Make them an evangelist for your product; buyers will come knocking.
Multiples are less relevant when your product can impact an entire company's future direction.
However, this deal is rare. It was the perfect mix of the right product against a vulnerable company at the right time. Unlikely we can draw parallels across more SAAS companies.