Could Microsoft Acquire Adobe, And For How Much?

Over the years, speculation about a potential merger between Adobe and Microsoft has continued to surface. Given the growth that Adobe continues to experience, any buyout offer at this point would likely have to come in at a significant premium to the current market price.

We expect, in the event of a merger materializing, Microsoft would likely end up paying around $310 per share for Adobe, a premium of about 25% to the current market price. We estimate this premium based on the following factors:

• Adobe’s intrinsic value: We estimate Adobe’s intrinsic value to be around $115 billion, though that is slightly below the current market price.
• Cost synergies:  There could be considerable cost synergies in an acquisition, since all of Adobe Experience Cloud (already running on Azure) should help, and there could be areas such as corporate, admin and the other expenses that could be pruned, as is typical in a merger.
• Revenue synergies: There are also likely to be revenue synergies by way of the experience cloud getting integrated in Microsoft’s search business. Further, gaming can benefit from user feedback and the ensuing learnings are likely to get reinforced across the combined entity’s ecosystem. This, plus cross-selling opportunities, should lead to incremental revenue growth.

Overall, the synergies could be as much as 40% of the combined entity’s market cap. As the next step, the question would be how the synergies are divided between Adobe and Microsoft. As a starting point, we have assumed that Adobe shareholders could get 10% of the total synergies, which would translate into a 25% premium from the current price levels.

Our interactive dashboard on Microsoft’s Potential Offer For Adobe outlines our forecasts and estimates for the potential merger. You can modify any of the key drivers to visualize the impact of changes on its valuation.

What Factors Favor A Merger?

• From a product stack standpoint, Adobe lacks salesforce automation capabilities which Microsoft has. Meanwhile, Microsoft is missing in the marketing space, where Adobe has a strong presence. Adobe is the leader in the digital experience ecosystem.
• Adobe SAP and Microsoft entered into the open data initiative, an alliance that helps to enable data to move across the platforms of the three companies.
• Adobe’s Experience Cloud completely runs on Microsoft Azure.
• On the softer side, the current CEOs of Microsoft and Adobe are childhood friends from school.

What Weighs Against A Merger

• Adobe’s current market capitalization is over $120 billion. With the expected impact of synergy benefits added to this number, Microsoft may need to shell out over $150 billion, if not more. This high price tag is likely to be the biggest deterrent.
• Potential competition from the likes of Google, Amazon and others could potentially increase the asking price even further. This is also likely to go against a possible deal.
• Anti-trust and privacy issues could also lead to hindrances to a possible deal

On balance, if Microsoft is willing to position itself as the buyer of the largest tech deal ever, many of the issues are likely to fall by the wayside. However, Microsoft’s motivation to do so may be limited given its recent acquisition of GitHub and focus on Azure.

Do not agree with our forecast? Create your own price forecast for Microsoft’s Potential Offer For Adobe by changing the base inputs (blue dots) on our interactive dashboard.