Adobe/Figma Merger
What’s Figma? That’s a dangerous question, but together with Adobe, they’ve been all over the news for a failed merger. The acquisition price was $20bn and now Adobe has a bill for a $1bn termination fee. The CMA is the one who nipped those dreams in the bud. Whilst there has been a lament for the lack of competitiveness and growth in the UK, the CMA has made it clear that you cannot buy your way to dominance. Both Adobe and Figma failed to show that they had procompetitive benefits from a merger that from the outset looked quite anti-competitive.
Market Definition
The CMA found a significant lessening of competition in 2 markets by this merger: the product design market and the vector-editing/raser-editing market. Product design software is used to design digital products such as apps or websites. Vector editing software is used to design logos and branding etc whereas raser editing is used to edit and compose images. The vector-editing/raser editing market is what Adobe is known for, holding 70% and 80% of the market respectively. Figma only holds limited capabilities in this market. On the other hand, Figma is dominant in the product design market, holding 80%. Adobe only holds 5-10%. On market shares alone, this market is quite dominant. However, it looks like quite a different story in the vector-editing/raser editing market, so what’s the reasoning?
Theory of harm
In the product design market, the CMA argues that due to Figma and Adobe being direct competitors, the level of combined market share and high barriers to entry and switching costs, the merged entity would have an incentive and ability to restrict competition. It’s a relatively open-and-shut case in that degree.
On the product design market, Adobe attempted to make the argument that it was planning to leave the market as it wasn’t viable. However, the CMA deemed that point null as Adobe continued to provide their current product design software and had made internal development projects. They took this as evidence that Adobe would have continued to compete with Figma without the merger.
The vector-editing/raser editing market is interesting as the CMA’s argument seems to hinge on the potential competition provided by Figma. The idea is that as the vector-editing/raser editing market and product design market share customers, Figma may consider developing their capabilities in the other market. As such, a merger would lead to the loss of a potential competitor for Adobe.
Whilst the parties attempted to contest the CMA’s definition of potential competition, I think some of the characteristics set out by the CAT in Facebook/Giphy are rather damming. Potential competition considers how innovative the target company is and therefore a potential competitor. Some characteristics to identify it are the motives of the merging firm, market value of the dynamic element, contestability and monetisation. The CMA determined that Adobe implemented the merger to get rid of Figma as competition. With the parties not accepting the divestment remedies, I’m likely to agree with their intention. Figma could be valued as low as $9bn compared to Adobe’s $20bn acquisition price. In my opinion, this valuation may be due to depressed market conditions in tech M&A and Adobe’s urgency rather than a note on the quality of Figma. There is potential for the company to make an IPO in 2025, showing market interest. Due to the barriers to entry noted by the CMA, the market is not easily contestable and therefore merger has more detrimental effects. Finally, monetisation is possible. Therefore, I think the CMA’s assessment of potential competition was enough to identify Figma as one.
Market Impact
There have been worries that this ruling shows that the UK is not open for business and is keen to stifle innovation. I do not take that to be the case. A merger by a strategic buyer such as Adobe would be looking at potential cost savings and revenue enhancements. Showing a competition authority those efficiencies may be able to sweeten the deal. However, in this case, I think the makeup of the market is what put off the CMA and the potential for domination in the two markets. I don’t think mergers are off the table, but they must have low threats to competition. If there were some synergies provided by this merger then maybe divestment of the assets would not have been too much of a problem, but it appears as if increasing market share alone was Adobe’s plan. Which is not a good look.
As such, the issue originates in the acquisition criteria phase of M&A. If it seems the only reason for the merger is to take out potential rivals, it will be a hard fight with the regulators. As the CAT is largely deferential in its assessment of the CMA’s decision-making, it will also be a hard fight there. So making a better judgement in acquiring a rival would be the best advice and seeking legal advice if necessary.
The merger itself should provide synergies which could be transferred to consumers. If those productivity gains cannot be shown there is nothing to offer to the regulatory authority. Potential innovation is merely a pipe dream, and nobody can live on it. It’s just as elusive as what Figma is.