Adobe-Figma Deal Is Like Instagram’s Buyout. Why That’s Trouble.
Now, Adobe’s $20 billion deal to buy start-up Figma is setting up to be a key test case: Regulators are getting another chance to prove their seriousness about protecting competition.
For years, Adobe ADBE –3.23% (ticker: ADBE) bears have said that the leading software provider for creative professionals risked getting disrupted by web-based start-ups. While Adobe has adapted to cloud-based subscriptions, much of its products remain rooted in the traditional desktop-software model and lack the collaboration architecture of the latest players. Figma, without legacy roots, has been more successful with the web model, which likely explains why Adobe is making such an expensive run at it.
Founded 10 years ago, Figma is forecasting $200 million of annual recurring revenue this year, making the $20 billion purchase equal to 100 times revenue—much pricier than the multiples for even fast-growing public cloud-software stocks.
According to FactSet, the average price-to-sales ratio for cloud-software companies in the WisdomTree Cloud ComputingWCLD –5.89% exchange-traded fund (WCLD) is just five times.
“Given the high valuation, most investors think Adobe was compelled to acquire Figma in response to increasing competitive pressure,” Bernstein analyst Mark Moerdler wrote last month. “For many it solidifies investor concerns around competition.”
When asked about concerns that the deal could be boosting Adobe today by stifling future competition, an Adobe spokesperson says the company and Figma are “not meaningful competitors,” adding, the “combination of Adobe and Figma will deliver tremendous value to consumers, advance complementary yet distinct product categories, and create new market opportunities.”
They might not be competitors now, but Facebook could have said the same thing about Instagram when it acquired the photo-sharing app 10 years ago for a billion dollars. Two years later, Facebook paid $19 billion for WhatsApp. Those deals opened the door for Facebook to dominate social networking as both grew into multibillion-user behemoths.
The Federal Trade Commission and Justice Department allowed them to proceed. But what was good for Facebook was bad for consumers. The FTC now argues in its antitrust lawsuit against Facebook parent Meta Platforms META –4.04% (META) that the purchase deprived users of the benefits of competition. An independent Instagram, the government says, would have encouraged product innovation, better privacy, and less reliance on advertising.
Two years ago, the FTC said that it was looking back at older tech deals to “deepen its understanding of large technology firms’ acquisition activity.” The commission should use that newfound understanding in evaluating Adobe’s Figma acquisition, which looks like a 2022 version of the Instagram and WhatsApp deals.
The FTC didn’t respond to a request for comment about Adobe and Figma.
Thus far, investors have voted with their feet, with Adobe shares tumbling by roughly 20% since the Figma deal was announced on Sept. 15. The government should weigh in, too.