Microsoft Can Acquire Adobe, Provided It Doesn’t Balk At A $260-Billion Price Tag

by Trefis Team
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Microsoft (NASDAQ:MSFT) and Adobe (NASDAQ:ADBE) have a lot in common. And the idea of the two tech giants merging to make the most of their complementary sets of offerings is worth exploring. Trefis highlights the reasons why Microsoft could acquire Adobe in an interactive dashboard along with our detailed workings of a potential acquisition price. We believe that Microsoft could pay as much as $260 billion to acquire Adobe – a figure that represents an upside of almost 90% to Adobe’s current market cap of $138 billion.

We detail the reasons why Microsoft’s can potentially acquire Adobe below, along with our calculations behind the estimated acquisition value of $258 billion. You can make changes to our assumptions and forecasts in the Microsoft-Adobe acquisition dashboard to arrive at your own estimates for a potential acquisition price. Additionally, you can see more Trefis technology company data here.

Why A Microsoft-Adobe Deal Makes Sense

Analytics is the Key

  • We think as the race to acquire and analyze data heats up with Salesforce’s acquisition of Tableau and SAP’s acquisition of Qualtrics, Microsoft could consider this mega-acquisition.
  • Microsoft and Adobe have been known to be close, with the two companies announcing another strategic partnership in March this year
  • Adobe’s fiscal Q3 2019 weakness in monetizing the Adobe Experience Manager could benefit from Microsoft’s help in the near term, as well as in the long run.

The complementary nature of offerings can help both companies unlock considerable value. Adobe’s product portfolio can be integrated across many of Microsoft’s offerings. Major synergistic combinations include:

  • In Digital Media, Adobe’s Creative Cloud fits in well with Microsoft’s Office and Game Pass offerings. While Photoshop and Dreamweaver are strong graphic products, the Document Cloud readily ties in with the Office suite.
  • Adobe’s Experience Cloud aligns well with Azure, Bing and Office 365.
    • Especially the advertising and marketing clouds within the Experience Cloud can amplify the up-selling potential across Bing and Office products.
    • The Magento Commerce Cloud can further help to complete the ensuring fulfillment stack. The Experience Cloud can also integrate with Microsoft’s Dynamics.
    • Azure is likely to be the ultimate beneficiary of the incremental analytics data that the Experience Cloud will be able to service.
    • Also, worth mentioning is the fact that Adobe’s Experience Cloud runs on Microsoft Azure.
  • Adobe’s Publishing products can easily be incorporated across Microsoft’s Office and Dynamics product lines.

In addition to the operational synergies, the current CEOs of the two companies are alumni of the same high school in Hyderabad, India.

Our Approach To Valuing Adobe In Microsoft’s Hands

  • Per Trefis fundamental analysis, Microsoft’s Revenue in 2021 is likely to be $139 billion. Using this and a P/S multiple of 8.6x for the company, we arrive at an estimated equity value of $1.2 trillion for Microsoft
  • Per Trefis fundamental analysis, Adobe’s Revenue in 2021 is likely to be $13.2 billion. Using this and a P/S multiple of 11.7x for the company, we arrive at an estimated equity value of $154 billion for Adobe
  • We expect the combined entity to witness an incremental revenue gain (or synergy) of 5% of the total revenue of the two standalone companies due to the complementary nature of offerings across divisions as detailed above.
    • This points to potential revenues of $160 billion for the combined entity in FY2021 (assuming that the entire incremental revenue gain is realized from year 1 of the acquisition).
  • We then weigh the standalone P/S multiple for each company with their projected revenues for FY2022 to arrive at a revenue-weighed P/S multiple for the combined entity.
    • The revenue-weighed P/S multiple represents the minimum figure that is appropriate to value the combined entity. We use the projected revenues after 3 years to account for the difference in expected revenue growth rates for the acquirer and the target
    • Starting with the revenue-weighed P/S multiple figure of 8.9x, and keeping in mind the fact that the merger will result in sizable recurring cost savings, we estimate a higher P/S multiple of 9.1x to be appropriate for the combined entity.
  • Using our revenue forecast of $160 billion and a P/S multiple of 9.1x for the combined entity, we arrive at an implied valuation of $1.46 trillion for the combined entity.
  • As we estimate Microsoft’s intrinsic value to be $1.2 trillion, this implies that Microsoft could pay up to $260 billion for Adobe,
  • Notably, if a deal actually is inked around this level, then it would make Microsoft’s acquisition of Adobe the largest M&A deals ever (unadjusted for inflation).

How Sensitive Is The Acquisition Price To The Revenue Synergy Estimate?

  • As is the case with any major acquisition, the premium Microsoft could be ready to pay to acquire Adobe would depend primarily on the amount of synergies the deal is expected to generate.
  • As a Microsoft-Adobe deal will be driven primarily by revenue synergies, we highlight how changes in the revenue synergy estimate affect the acquisition price in the chart below.
  • The maximum acquisition value for Adobe ranges from $203 billion to $314 billion for expected revenue synergies between 1% and 9%.
  • Notably, this represents an acquisition premium between 47% and 127% to Adobe’s current market cap

What Are The Major Deterrents To A Potential Deal?

  • Recent M&A deals in the technology space have closed in the range of 10-26x P/S.
  • While SAP paid nearly 20x for its Qualtrics purchase, Salesforce.com paid closer to 12x.
  • Per Trefis estimates, Microsoft would be paying almost 20x of Adobe’s expected revenues of $13.2 billion for fiscal 2021.
  • Based on our fundamental assessment of the two companies’ valuation, despite the compelling logic and the associated synergies, the price tag of $260 billion in itself will be a major deterrent.

Think we have been too optimistic / pessimistic with our forecasts? Feel free to input your own forecasts in the Microsoft-Adobe acquisition dashboard and see how that impacts the potential acquisition value.

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Like our charts? Explore example interactive dashboards and create your own.

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