TEK2day

Operating at the Intersection of Technology and the Capital Markets

When CEO Compensation Is The Primary M&A Driver

Too frequently companies execute M&A transactions not because a given acquisition strengthens the acquiring company’s competitive position or enhances customer value, but because the acquired company could help boost CEO compensation of the acquirer by driving some combination of higher total revenue growth, higher EBITDA, higher bookings and/or a higher stock price.

Today’s announcement that Adobe (tkr: ADBE), plans to acquire Figma for $20 billion in a cash and stock transaction seems to be an acquisition primarily driven by Adobe CEO Shantanu Narayen’s desire to maximize his incentive-based compensation.

  • Adobe is willing to overpay for Figma. When a company is willing to overpay for an acquisition, especially a large acquisition, red flags should go up. Adobe agreed to acquire privately-held Figma for $20 billion in cash and stock (approximately half cash, half stock). This valuation implies a 50x Revenue multiple on Figma’s 2023 ARR. How does Adobe justify paying 50x forward revenue given this weak Tech market backdrop? (the NASDAQ Composite has traded off 27% year-to-date, ADBE shares have traded off 45% year-to-date). Figma may have taken share from ADBE at the margin, but that does not justify such a rich valuation in this weak market.
  • CEO compensation is the driver of this acquisition. A quick read of Adobe’s proxy details the compensation drivers of Adobe CEO Shantanu Narayen incentive-based compensation package. There are two key drivers to Narayen’s compensation that carry equal weighting: 1.) Total Stockholder Return and 2.) ARR growth (see the italicized text from Adobe’s proxy below). Figma will certainly drive ARR growth, however, Narayen and ADBE’s Board may have misjudged the Total Stockholder Return component as investors have puked all over this deal.
    • Relative TSR (“Total Stockholder return”), over the three-year performance period;
    • A new financial Net New Sales metric, combining Digital Media net new ARR and subscription revenue growth in Digital Experience, over three one-year periods. No 2022 PSP awards will vest before the third anniversary of the date of grant. The addition of Net New Sales will help ensure our NEOsโ€™ financial incentives are aligned with the companyโ€™s strategic priorities and continued growth.
    • ADBE Proxy link: https://www.sec.gov/Archives/edgar/data/796343/000079634322000078/adbeproxy2022.htm

Perhaps ADBE may pass on this deal with investors puking on it, which hurts 50% of Narayen’s at-risk compensation formula.