Analyzing an M&A Transaction

Analyzing an M&A Transaction

We were critical of Adobe’s (ADBE) acquisition of Figma for a few reasons. These elements can be applied to the analysis of any M&A transaction.

  1. Valuation: 50x revenue is a rich valuation no matter how you slice it. I don’t care how unique Figma’s product offerings may be or how competitive the deal may have been. It is impossible for ADBE to argue that it is a disciplined buyer after agreeing to acquire Figma at this valuation.
  2. Governance/Board: Who on ADBE’s board is qualified to ask tough questions about the Figma deal or any acquisition for that matter? Anyone is qualified to push back on valuation (no need to be a product expert). Therefore, did anyone on the Board push back on valuation or any other deal element?
  3. Governance/CEO Compensation: Approximately half of Adobe CEO Shantanu Narayen’s compensation is tied to ARR growth, thus it is difficult to not be cynical when one considers what Figma will do for ADBE’s ARR growth (grow ARR while growing Narayen’s incentive-based compensation), while considering the extremely rich 50x revenue valuation.
  4. Pay-for-Performance and PSUs: ADBE boasts a pay-for-performance culture and executive compensation structure, yet why does this not carry over to the Figma deal? Figma executives and employees were awarded an additional 6 million RSUs (“Restricted Stock Units”), which is approximately $1.8 Billion at ADBE’s current share price. The RSUs will vest over 4 years, yet there is not a performance-based component to the additional purchase consideration. Typically, additional purchase consideration would be tied to meeting Revenue and Profitability targets over a 3-4 year period. This additional purchase consideration would be awarded as Performance Share Units (“PSUs”), but I do not see a PSU component to the Adobe/Figma deal.

There are other important elements that must be considered as part of any M&A transaction such as culture, financials/profitability, key employees, key customers and product portfolio to name a few. However, the 4 above elements are the primary reasons why we were critical of the ADBE/Figma transaction.

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