BREAKINGVIEWS-Figma IPO chalks one up for trustbusters

By Jeffrey Goldfarb

NEW YORK, July 3 (Reuters Breakingviews) - When it comes to design software, trustbusters knew where to draw the line. Less than two years after competition concerns quashed Adobe’s ADBE.O $20 billion acquisition of rival Figma, the erstwhile takeover target has drafted plans for an initial public offering instead. It’s shaping up to be a brighter outcome for all stakeholders.

The 2022 deal was smudged from the start. Adobe, maker of the popular editing tool Photoshop, agreed to pay 50 times Figma’s annual recurring revenue, a lofty valuation that led to the loss of $27 billion in market value the day investors heard the news. British, European and U.S. regulators also flagged concerns about the merger’s effect on products and prices for consumers. After begrudgingly abandoning the transaction in December 2023, Adobe said it would buy back $25 billion of its own stock instead over time.

Figma Co-founder and CEO Dylan Field quickly sketched out a Plan B. Fortified with a $1 billion breakup fee from Adobe, he accelerated the vesting of restricted stock units to help retain and attract staff, while also doling out fresh equity options. Moreover, he beefed up sales and marketing, as well as artificial intelligence initiatives, which have helped turbocharge growth.

The 13-year-old company’s financial picture is getting sharper. Revenue increased in the first quarter by 46%, to $228 million, from the same period a year earlier, when the gain was 43%. Its gross profitability is an eye-popping 91% and the balance sheet holds $1.5 billion of cash. With a top-line growth rate and adjusted operating margin that tallies 64%, Figma crushes the software industry’s closely watched benchmark of 40%.

Achieving the same $20 billion valuation will require some creative license. Despite Figma’s promising trajectory, the figure would be 24 times its roughly $820 million of sales over the 12-month stretch through March. Adobe trades at about 9 times last year’s revenue, according to Visible Alpha, and high-flying collaborative software developer Atlassian TEAM.O commands 13 times. Even so, renewed enthusiasm for market debuts and almost anything AI-related should help underpin the IPO. All told, it’s a good illustration of how strong competition models provide valuable perspective.

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CONTEXT NEWS

Figma on July 1 disclosed details for an initial public offering, 18 months after the design-software developer abandoned a $20 billion sale to rival Adobe because of antitrust resistance.

In its prospectus, Figma said it swung to a net loss in 2024, after gross profit increased 44%, to $661 million, from a year earlier, on a 48% jump in revenue, to $749 million. The company also burned $68 million after generating $1 billion of free cash flow in 2023.

After the Adobe deal collapsed, Figma allowed owners of restricted stock units to sell them, which led to the recognition of an approximately $800 million expense. Stock option grants increased the figure.

Morgan Stanley, Goldman Sachs, Allen & Co. and JPMorgan are listed as the lead underwriters, with BofA, Wells Fargo, RBC, William Blair and Wolfe/Nomura Alliance also advising on the IPO.