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We Estimate That Microsoft Could Pay Close To $260 Billion To Acquire Adobe
This represents an upside of almost 90% to Adobe's current market cap of $138 billion
Potential Acquisition Value
Adobe's Current Market Cap
We detail the reasons why Microsoft's can potentially acquire Adobe below, along with our calculations behind the estimated acquisition value of $258 billion
Note: Adobe's current market cap is as of 18-Sep-2019.
Why A Microsoft-Adobe Deal Makes Sense
Analytics is the Key
We think as the race to acquire and analyze data heats ups 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 yearAdobe's fiscal Q3 2019 weakness in monetizing the Adobe Experience Manager could benefit from Microsoft's help.
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 also are the alumni of the same high school in Hyderabad
Note: We have recast Adobe's revenues which are based on a fiscal year ending November to align it with Microsoft's reporting period ending June
Amazon, Microsoft and Google Cloud Compared:
Is $20 Billion in Google Cloud Revenue Possible by 2020?
#1. Estimating Microsoft's Standalone Equity Value
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
Microsoft's Equity Value [= A x B]
Total Microsoft revenue [A]
Microsoft's Standalone P/S [B]
#2. Estimating Adobe's Standalone Equity Value
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
Adobe's Equity Value [= C x D]
Total Adobe revenue [C]
Adobe's Standalone P/S [D]
#3. Estimating The Value of the Combined Entity
Step 3.2: Estimating Potential Revenue Gains (Synergies) From The Merger
Combined Revenue with Synergies [= M x (1+N)] (2021 onwards)
Combined Revenues for Microsoft+Adobe [M]
Expected Revenue Synergies [N]
We expect the combined entity to gain 5% of the total revenue of the two companies due to the complementary nature of offerings across divisions as detailed above.
Step 3.3: Estimating Appropriate P/S Multiple For Combined Entity
We 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.
Revenue-weighed P/S Multiple for 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
(Additional details in the collapsed section below)
Estimated P/S Multiple for Combined Entity
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.
Click here to modify the factors contributing to the unadjusted P/S multiple for the combined entity
Microsoft Expected Revenue Trend
Microsoft's Implied Revenue CAGR (F2019-22)
We forecast revenues for Microsoft to grow from $125.8 billion in FY2019 to $144 billion in FY2022 - representing an expected CAGR of 4.6%
Microsoft's standalone P/S [e]
Adobe's Expected Revenue Trend
Adobe's Implied Revenue CAGR (F2019-22)
We forecast revenues for Adobe to grow from $9.3 billion in FY2019 to $16.4 billion in FY2022 - representing an expected CAGR of 20.9%
Adobe's standalone P/S [k]
#4. Deriving Adobe's Value in Microsoft's Hands
Per our estimates, Microsoft could pay up to $258 billion for Adobe, making it one of the largest M&A deals ever
Implied Value of Adobe to Microsoft [= A - B ]
Implied Value of Combined Entity [A]
Microsoft's Standalone Equity Value [B]
How Sensitive Is The Acquisition Value To Estimated Revenue Synergies?
Adobe Acquisition Value by Estimated Revenue Synergies
As shown in the chart to the right, the maximum acquisition value for Adobe ranges from $203 billion to $314 billion for expected revenue synergies between 1% and 9%.
This represents an acquisition premium between 47% and 127% of Adobe's current market cap as detailed in the chart to the left
Adobe Premium to Current Market Cap by Estimated Revenue Synergies
How Would A Potential Microsoft-Adobe Deal Compare With Other Deals In Terms Of Acquisition P/S Multiple?
At 19.6x, the Adobe deal will be higher than the average multiple of 16.9x.
Implied P/S for Adobe
Average P/S multiple
What Are The Major Deterrents To A Potential Deal?
We note that 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 revenues. Based on our fundamental assessment of the two companies' valuation, despite the compelling logic and the associated synergies, the price tag of $260 billion will be a major deterrent.
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DISAGREE WITH OUR FORECASTS? CREATE YOUR OWN
1. How to save your forecasts:
Click on the blue "Try Trefis" button in the header to create an account, then navigate back to this dashboard. Now, any changes you make to these inputs will be auto-saved as a scenario (see left panel of dashboard).
2. How to monitor your scenario vs. actual results
Once you've saved your forecast, you can "rename" your scenario by clicking on the gear icon next to the scenario (on the left panel). For more info, see this quick, 30-sec video (look at the 9 sec mark)
With your forecast saved and named, you can see how well you forecast the company's performance at the end of each period and compare your forecasts to hundreds of other Trefis users who came up with their own forecasts. Lastly, you can share with friends and colleagues to show them how you fared and compare your forecasts to theirs.