Adobe Inc. agreed to buy software design startup Figma Inc. in a deal valued at about US$20 billion in a bid to expand its suite of creative tools for professionals.

The deal announced by Adobe, which is a mix of half cash and half stock, confirms an earlier Bloomberg report and would mark the biggest ever takeover of a private software company, according to data compiled by Bloomberg. It’s also Adobe’s biggest acquisition and the market found the deal expensive, sending shares to their steepest single-day decline since 2010.

Figma, which allows customers to collaborate on software as they build it, saw demand jump during the pandemic while more people worked remotely. The company expanded its customer base in recent years from software designers at big companies like Airbnb Inc., Google, Herman Miller and Kimberly-Clark Corp. -- to also include individuals building lightweight games, maps and presentations. It has also attracted a loyal student following. 

The combination benefits “literally anybody who is a knowledge worker,” said Adobe Chief Executive Officer Shantanu Narayen, in an interview.

Adobe, which had been a Wall Street favorite for more than a decade, has been pummeled in the tech downturn, seeing its stock lose 45 per cent of its value since the start of the year. Investors have become increasingly skeptical about the dominance of Adobe’s line of software for design professionals, which makes up about 60 per cent of its revenue. The company has targeted more accessible web-based offerings such as Adobe Express to sell its creative software to consumers, small businesses, and social media influencers. But the initiative ran into friction from upstarts including Figma, Lightricks Ltd. and Canva Inc. 

San Francisco-based Figma was co-founded about a decade ago by Dylan Field and Evan Wallace. The startup introduced browser-based software design tools that allow software designers to work together in real-time, bypassing the sometimes clumsy process of saving and sending their work to collaborators using a collection of disparate apps. 

The company was valued at US$10 billion in its last funding round a year ago. Figma’s backers include venture capital firms Kleiner Perkins, Index Ventures and Greylock Partners.

“Figma was at the scale that it was a serious standalone company -- the path was to go public,” said Figma board member Mamoon Hamid, a partner at Kleiner Perkins. “The right company made us an offer we couldn’t refuse.”

The deal’s “very high” valuation is likely weighing on Adobe’s stock, said Bloomberg Intelligence’s Anurag Rana. He added that Figma may add less than 2 per cent to Adobe’s sales growth rate, and will likely decrease margins.

Analysts questioned Adobe executives on their valuation of Figma during the company’s earnings call Thursday. But Adobe defended its business strategy. “I understand that there’ll be some sentiment associated with the price, and the ball’s in our court to go demonstrate,” Narayen said on the call.

The shares plunged 17 per cent to US$309.13 at the close Thursday in New York, making it the worst performer on the S&P 500. 

The transaction is expected to close in 2023, pending regulatory and other approvals, Adobe said. After closing, Field will continue to lead the Figma team, reporting to David Wadhwani, president of Adobe’s digital media business. Figma will continue to exist as a standalone product. “We’re confident that if you look at this in the long run, it’s going to be a big value for their shareholders and our shareholders as well,” Narayen said. 

This isn’t Adobe’s first acquisition focused on collaborative software. It bought Frame.io, a video feedback platform, for US$1.3 billion last year and Workfront, a project management service, for US$1.5 billion in 2020. Frame.io annual recurring revenue grew more than 50 per cent in the second quarter, and Workfront sales more than 35 per cent, Adobe said.

Adobe also announced third-quarter results on Thursday, showing revenue jumped 13 per cent to US$4.43 billion. That was in line with analysts’ estimates but marked the third consecutive quarter of growth of less than 15 per cent, as Adobe has been buffeted by economic uncertainty and by the strong dollar overseas. Adjusted earnings per share were US$3.40, better than Wall Street expected. It provided a revenue forecast for the current period of US$4.52 billion, in line with estimates.

Figma will have a total addressable market of US$16.5 billion by 2025, according to the statement. The company is expected to add about US$200 million in net new annual recurring revenue this year, surpassing US$400 million in total annual recurring revenue by the end of 2022, with a net dollar retention rate, which measures revenue growth from existing customers, of greater than 150 per cent, Adobe said in an investor presentation. Figma has gross margins of about 90 per cent, and about 850 employees, Adobe said. The transaction is expected to be accretive to Adobe’s adjusted earnings per share at the end of the third year.

According to terms of the deal, about 6 million additional restricted stock units will be granted to Figma’s CEO and employees that will vest over four years after closing. Adobe expects the cash consideration to be financed through cash on hand and, if necessary, a term loan.

Qatalyst Partners advised Figma along with the law firm Fenwick & West while Allen & Co. was Adobe’s adviser along with Wachtell, Lipton, Rosen & Katz. The deal includes a termination fee of US$1 billion in cash.