Pro Take: M&A Deals Take Longer, Fall Apart More Often, Straining Startups
The terminated Figma-Adobe merger is an example of an extended acquisition process
It took 15 months between the announcement of the definitive agreement by Adobe to buy Figma and the deal’s termination. Add to that the time from the start of conversations, and it is a protracted period.
Drawn-out merger processes strain private companies.
“It’s really hard for a company to live in this limbo,” said Tomasz Tunguz, general partner at Theory Ventures. Tunguz served on the boards of Kustomer, which was bought by Meta, and Looker, acquired by Google.
Boards can spend hours weekly working on responding to regulatory authorities, and on integration issues. Recruiting and sales get more complicated while potential employees and customers are unsure about what they are dealing with—a stand-alone startup or a company that is about to become part of a much bigger one, Tunguz said.
Dylan Field, Figma’s co-founder and chief executive, addressed some of the strain the company experienced in his announcement of the deal’s termination. Adobe was due to pay $20 billion in cash and stock for the startup. The deal was called off in a mutual decision due to regulatory challenges, the companies said.
“It’s not the outcome we had hoped for, but despite thousands of hours spent with regulators around the world detailing differences between our businesses, our products, and the markets we serve, we no longer see a path toward regulatory approval of the deal,” Field wrote.
The day the Figma-Adobe deal was terminated was also the first day of a two-week holiday time off for Figma employees, said a person familiar with the situation. The company’s management held a virtual town hall to discuss the news on Monday, the person said.
Despite the challenges of the acquisition process, Figma continued to ship products and added about 500 employees to total about 1,300 now. It also acquired another startup, Diagram, earlier this year.
Acquisitions are now taking longer and are much less likely to close than two years ago, and it isn’t just because of regulatory scrutiny, said Aly Love Simons, corporate partner at the law firm Debevoise & Plimpton, and a member of the firm’s mergers and acquisitions and technology groups.
“Buyers are doing more diligence,” she said. “On the private equity side, it’s taking longer to get the debt together.”
Two years ago if a venture-backed company got a term sheet from an acquirer, it was virtually assured the deal would be completed, Love Simons said. Today, “if you have a signed term sheet, there’s maybe a 50% or 60% chance that the deal will get to the definitive agreement, and then only an 85% chance that the deal closes,” she said.
Often, during deal deliberations, the culture at a startup has to change, from openness to increased confidentiality.
For example, venture-backed company CEOs often have calendars that are visible to other company employees, Love Simons said. When an acquisition is being discussed, the CEO’s calendar is no longer visible.
Even open-floor offices can be reconfigured. “There are new rooms with locked doors and no windows,” she said.
Companies that are considering selling must account for both the time and the cash required to sustain their business during that process, and the distraction on management and employees that it takes, Love Simons said.
While selling a business has gotten more onerous, many boards are forced by the market to explore those options, Love Simons said. Acquirers, both strategics and private equity, are still interested in buying, she said, especially now that startup valuations have begun declining. And startup boards that face a worsened venture fundraising market often consider acquisitions as a necessary path forward, she said.
Still, when a deal like this falls apart, “it’s an emotional loss,” Tunguz said.
Employees who expected a payout no longer get one. Venture investors who marked their holdings closer to the acquisition price likely need to adjust.
“The management has to reinvigorate the business somehow,” Tunguz said.
One way Figma may consider going about that, he suggested, is by making its own acquisition and telling the market about a new direction the business is taking.
Stand-alone businesses, of course, have the advantage of being in greater control of their product and other plans.
Figma should receive $1 billion in a termination fee it could use to rebound. That could help the company figure out its next move.