The EU and UK regulators shut down Adobe's proposed $20 billion acquisition of Figma in December 2023. The deal had been announced in 2022 and spent over a year in regulatory review. The circumstances surrounding its demise are more intriguing than the fact that it failed.
Adobe's interest in Figma stemmed from its inability to produce a competitive design tool for the screen design era within its Creative Cloud suite. Sketch and then Figma became the go-to design tools for product teams. Figma's collaborative, browser-based approach differed significantly from Adobe's desktop-native strategy, and Adobe couldn't replicate it internally quickly enough. The $20 billion offer reflected its acknowledgment that developing the capability organically would take too long.
I have seen similar attempts at internal replication fail in production, where a company tries to build a competing product by allocating a team and resources to the task. For instance, when Microsoft tried to build a competitor to Slack, it ended up with a product that had similar features but lacked the user base and network effects that made Slack successful. In Adobe's case, its XD product is a good example of a tool that was supposed to compete with Figma but never gained the same level of traction. This is because building a competitive product requires more than just features, it requires a deep understanding of the user's needs and a strong ecosystem of plugins and integrations, which can be hard to replicate.
Both the EU and the UK's Competition and Markets Authority concluded that the merger would eliminate a significant competitive threat to Adobe in the creative software market. Adobe's Photoshop and Illustrator products compete with Figma in certain use cases. Regulators worried that Adobe would reduce investment in Figma as a competitor to its own products. The AI design tools angle also featured in their analysis: both companies are developing generative AI tools for design, and the merger would reduce the number of competing approaches. For example, Figma's acquisition would have given Adobe control over the development of Figma's AI-powered design tools, such as its auto-layout feature, which could have limited the innovation in this space.
The trade-off between allowing a merger to proceed and preserving competition is always a difficult one, and regulators have to weigh the potential benefits of a merger, such as increased efficiency and investment, against the potential risks of reduced competition. In this case, the regulators decided that preserving competition was more important, especially given the rapidly changing nature of the creative software market. This decision was likely influenced by the fact that the market is increasingly dependent on AI-powered tools, and reducing the number of competitors in this space could have long-term consequences for innovation and consumer choice.
The timing of the deal's demise is noteworthy. The merger was announced before the generative AI wave transformed creative software economics. By the time regulators reviewed it, Adobe had launched Firefly, its generative image model, and Figma had announced AI features. Regulators evaluated the deal in a context where AI was changing what creative software could do and concluded that preserving two independent competitors developing AI design tools was better for innovation than a merger. For instance, the use of AI-powered tools like Midjourney and DALL-E 2 is becoming increasingly popular in the creative industry, and having multiple competitors in this space can drive innovation and improve the quality of these tools.
The outcome of this deal has implications for tech mergers and acquisitions. The AI wave is making tech regulators more skeptical of large horizontal mergers in software. The argument that a large company needs to acquire a smaller one to compete effectively is harder to make when AI tools are rapidly changing the capability baseline. Regulators are monitoring whether AI makes markets more or less concentrated. The Figma/Adobe outcome suggests they are willing to block deals that resemble capability acquisitions in a rapidly changing AI landscape.