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At this point, I worry about Adobe
By Alex King
This is a company which, let us not forget, was born at a time when the mere act of trying to print a page from a computer was a difficult thing to do, and Adobe developed and licensed and resold software that eased the pain. As that commoditized, the company moved into desktop publishing software. As that became less special - and in particular as they lost the race (it was an important race at the time!) to Quark Xpress - they refocused on imaging, in the guise of Photoshop. Which I had not realized they paid just $35m for, after a probably modest royalty stream to the original authors. Along comes the Internet, print volumes become less important, they move into graphical content and stock photography and a bunch of other things. They take static PDFs from just a way to share docs between computers running different operating systems into a legally recognized e-signature system. And so on. The great skill of this company is that it has adapted in the wild, on the fly, in real time, and the stock has mooned with it.
I mean this isn't even funny.
Many of the company's key switcheroos were M&A events - the move into online graphical capability was cemented with its $3.5bn 2005 acquisition of Macromedia, for instance. The company has achieved all this without any meaningful knockbacks from antitrust authorities or successful antitrust suits brought by competitors. Superb execution; not like the Ballmer/Gates-era Microsoft, whose Windows monopoly cashflows regularly took a hit from EU and other regulatory fines, nor like Google in the last decade or so, hit time and again by huge fines. Adobe? Something to do with PDFs, right? Slipped right under the radar most of the time.
In the last couple years Adobe has watched generative AI technology nibble at its heels. Adobe has been a go-to brand for human creators; if machines are to do more creating themselves, this is a direction you would expect Adobe to go. The planned $20bn acquisition of Figma in 2022 was a step in this direction, bridging software to be used by humans in order to generate digital content. I personally thought this was an excellent acquisition by Adobe, directly analogous to the acquisition of Instagram or WhatsApp by Facebook/Meta Platforms. Pay big to close out a competitor and use it to keep one step ahead of the shoeshine. Adobe shareholders (as is typical when companies acquire - the notion that all-acquisitions-are-bad seems to have become lore, at least with retail holders) disagreed, dumping big on announcement. Well, come the end of 2023, the Luddite contingent got their wish when Adobe and Figma nixed the deal, citing the impossibility of solving for regulatory concerns. Cue a lot of wailing in the boardroom at Figma I suspect, for this would have been one of the most successful venture capital deals of all time.
Here's what happens when legacy companies look like they may have run out of their nine-plus lives.
This quarter's numbers are notable primarily for the $1bn - in cash! like, an actual billion dollars - paid to Figma in exchange for, er, not buying the business. This was in my opinion a dumb piece of negotiating by Adobe's M&A team; it suggests a complete failure to read the regulatory room. But at least the next Figma board meeting will have pretty good sandwiches. (It also tells you how much power Figma had over Adobe in those negotiations. Which is to say, all the power. Which makes me worry still more about that legacy ball and chain thing).
Here are the headline numbers. They would look fine if you added back $1bn of EBITDA and $1bn of net cash. That's a lot of sandwiches.
I myself don't own any ADBE stock. I would worry if I did.
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