In cautious 2022, investors buck against expensive Adobe M&A deal

Paying a high price for an attractive target, Adobe Inc. is making a very move from 2021 to the end of 2022, and investors are hesitant amid turbulent times.

The creative software company reported mixed quarterly results on September 15 and announced the $20 billion acquisition of Figma Inc., a small private company operating in the same segment.

Adobe will pay a mind-boggling premium for the target of roughly 50x Figma’s expected annual recurring revenue by 2022 and 2x its most recent pre-money valuation. Such high valuations may have been less surprising during the record-breaking tech M&A rush in late 2020 and into 2021, but it’s less consistent with the increasingly cautious market of 2022.

On the earnings side, Adobe posted modest gains and a slight revenue loss compared to analyst forecasts, according to consensus estimates from S&P Capital IQ. But those metrics also underscored a dramatic business slowdown for the company, with revenue growth slowing 58% compared to a year earlier.

In the end, investors were upset and sold 16.8% of Adobe stock in one day.

Adobe’s public thrashing comes after a difficult nine months for many IT stocks. The high-tech Nasdaq index has lost 26.2% in the year to September 15.

Marketers seem particularly skeptical of mature software-as-a-service, or SaaS, companies. For example, Salesforce Inc. is one of Adobe’s most comparable peers by market capitalization and financial performance. For the year to September 15, Salesforce shares are down 39.1%. Adobe shares have fallen 45.5% over the same period, including the drop after the announcement of the Figma deal.

The bearish turn for SaaS stocks comes despite generally upbeat comments from analysts about the low-spend, high-margin business. For example, average analyst ratings for both Adobe and Salesforce are in the “buy” and “beat” range, according to S&P Global Market Intelligence.

Figma has gross margins in the 90% range, Adobe CFO Daniel Durn said during a Sept. 15 earnings call. Adobe has more cash and short-term investments than debt, making it one of the few publicly traded technology companies with negative net debt, according to data from Market Intelligence. The company will pay Figma’s gold-plated price with cash, stock, and possibly a short-term loan, so even its biggest acquisition to date won’t affect Adobe’s serene balance sheet.

While investors may have turned negative on high-profile SaaS stocks, M&A buyers have seen considerable value.

Deal volumes and values ​​for SaaS providers have been increasing steadily over the years, with 2022 keeping pace with the records set in 2021. For M&A transactions targeting a SaaS company, Deal volumes increased to 2,007 transactions in 2021 from 849 in 2017. Deal values ​​soared to $335.48 billion from just $43.72 billion during the same period, more than 7 times. Year-to-date, SaaS transaction volumes reached 1,824 transactions and value added was $247.06 billion, according to 451 Research.

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SaaS companies also command a premium over other technology models. Buyers valued the average SaaS company at 4.8x 12-month-to-date revenue, down from the 2021 peak of 6.7x. Across all tech and telecom targets, valuations have averaged just 3.1x year-to-date and 4.3x in 2021, according to 451.

Illustrating growing investment interest from corporate buyers, the 10 largest strategic SaaS transactions over the past 20 years have been announced since 2019, with only two having revenue multiples of less than 10x. The Figma acquisition is the sixth largest SaaS deal, and Adobe is paying its premium at a time when other corporate buyers are freezing their M&A strategy. The average price-to-income multiple for technology deals involving a strategic buyer fell to 1.8 times in July and early August, according to 451.

One of the highest SaaS M&A valuations came from Salesforce, which offered 36.4 times final revenue for Slack Technologies in 2020. Largest SaaS transaction of all time, Broadcom’s $61 billion offering Inc. by VMware Inc., generated an ending revenue multiple of 5.3x.

Adobe didn’t provide specific final revenue metrics for Figma in its acquisition announcements, but the buyer indicated that Figma will exceed $400 million in annual recurring revenue in 2022 after adding $200 million from 2021. That puts the price at roughly 50x 2022 annual revenue. recurring and 100x 2021 annual recurring revenue.

That implies an easy favorite for the highest final revenue valuation among the top 10 SaaS transactions since 2002.

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451 Research is part of S&P Global Market Intelligence.

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