Why Adobe wants Figma, and why some investors are worried

Why Adobe wants Figma, and why some investors are worried

Adobe Inc.,

ADBE -3.12%

The low-key maker of digital tools for creating PDFs and editing photos pleased investors by reinventing itself as a subscription software business. His latest attempt to keep up with the times isn’t all that great.

Last week, Adobe unveiled its biggest acquisition yet, agreeing to buy Figma, a little-known software startup that specializes in helping digital creators collaborate. The $20 billion deal price spooked investors and raised questions among analysts about the health of Adobe’s business.

Tools for editing and manipulating photos and videos are in high demand, with people creating visual content like never before. Since the start of the pandemic, designers have increasingly collaborated remotely, relying on digital tools to do so. This fueled demand for new apps, spawning startups like Australia-based Figma and Canva.


What does the acquisition of Figma mean for Adobe? Join the discussion below.

Adobe, the biggest competitor in the design software market by sales, has struggled to capitalize on this enthusiasm and is starting to feel the impact. The company on Thursday reported quarterly results that showed a continued slowdown in revenue growth and issued guidance that fell short of Wall Street expectations. New annual sales of subscriptions tied to its Creative Cloud service, which includes features such as its popular Photoshop suite, were slightly off the company’s previous projection.

Adobe products like Photoshop and Illustrator are almost essential tools for people who design marketing materials and magazines. However, some users have complained on social media and elsewhere that the products are clunky and lack the collaboration features available with Figma and elsewhere.

“Figma is fast, small and lean,” said Daniel Vinci, who runs a freelance website design firm, saying he and his clients have embraced the startup’s tools for the ease of collaborative work on digital projects. “Anyone can pick it up and start working. No Adobe product works like that,” he said.

Adobe said it is constantly updating its products and has introduced collaboration features in recent years.

Figma’s appeal to users like Mr. Vinci explains why Adobe was willing to pay 50 times the smaller company’s expected annual recurring revenue for 2022 and twice the valuation it received in a funding round last year.

“The market is at such a level that it raises concerns about what’s going on under the hood with the core business,” said Brian Schwartz, senior analyst at investment firm Oppenheimer & Co.

Speaking at a company event in 2019, Adobe CEO Shantanu Narayen says the current weak economic backdrop presents an opportune time for the company to act.


Jeff Bottari/Associated Press

Adobe shares fell nearly 17% on Thursday after the announcement and an additional 3.12% on Friday. The stock is down about 47% this year, underperforming the broader market.

Adobe chief executive Shantanu Narayen defended the acquisition as “transformational”, adding in a call from analysts that big deals are often met with skepticism.

Today’s weak economic environment, he said, is the right time for the company to act.

“The strongest companies are actually the companies that will have to make the moves to position themselves to serve customers for decades,” Mr. Narayen said in an interview. “We really think the opportunity for us is to usher in this new world of collaborative creativity.”

Mr. Narayen’s ability to buy Figma at this price in large chunks is based on the success he had transforming Adobe a decade ago. Mr Narayen took over the company in 2007 when it sold its software to users, usually on discs. But the software business was being transformed as the growing field of cloud-computing led to the sale of such products online, as a service and by subscription.

In 2011, Mr. Narayen embraced the shift, making Adobe the rare software provider at the time to adapt to the pop-up sales model that has now become ubiquitous. The company at the time had about $4.2 billion in annual sales. It now produces more than that in a quarter. Adobe grew into a software giant with a market value of $320 billion at its peak last year, and its stock had risen 10-fold over the past decade before the Figma deal was announced.

During Adobe’s shift to the cloud, there were naysayers, too, who questioned the company’s strategy, Mr. Narayen said. “Everybody points to the few people who have questions whenever change happens, but the believers are the ones you really want to prove right,” he said.

Other software companies have been slower to adapt. Oracle Corp.

, the big database software provider, for years downplayed the importance of cloud computing and is now spending heavily to expand those operations. International Business Machines Corp.

Similarly, it was slow to move to the cloud and then spent about $34 billion in 2019 to acquire Red Hat Inc. to strengthen its market presence.

Adobe executives say the acquisition of Figma will spark a new era of development. “This is about positioning the company to define new categories and drive growth for decades to come,” said Chief Financial Officer Daniel Durn.

Figma, Adobe said, would also help it tap into a new user base. The company says that in addition to the community of designers already using its tools, Figma will add developers and others who haven’t typically been its customers.

To prove skeptics wrong, Mr. Narayen said, the company will also focus on showing strength in its core business.

The deal, which still has to go through regulatory review and is otherwise set to close next year, will add collaboration features to Adobe’s products that the company has struggled to build on its own. In 2016, Adobe released a collaborative design tool, but it didn’t gain traction in the market, said Scott Belsky, Adobe’s chief product officer, and the effort has largely died. Now, he said, Adobe plans to start bringing more of its design tools to Figma, such as image editing capabilities from Photoshop, to make collaboration easier.

Figma users, however, are concerned about the combination. Mr. Vinci, the freelance web designer who fell in love with the startup’s product, said he is currently looking at alternatives such as Dutch design software company Sketch BV.

Write to Aaron Tilley at aaron.tilley@wsj.com

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