Adobe Inc (NASDAQ:ADBE) is likely to undertake an expanded share buyback program after it terminated its merger with web design firm Figma, analysts at Jefferies believe.
“The deal termination frees up Adobe’s cash as the deal would have required a $10 billion cash payment, though now offset by the $1 billion termination fee,” the analysts wrote in a note to clients.
“Adobe had $7.8 billion in gross cash ($3.6 billion debt) as of fiscal fourth quarter-end, and it generated free cash flow of $6.9 billion in the 2023 financial year and $7.4 billion in the 2022 financial year – providing it with ample cash resources to fund an expanded buyback.”
The analysts wrote that they were puzzled about the Adobe-Figma deal not closing after failing to win over regulators amid competition concerns.
“We still believe competition concerns are overblown and that products are complementary,” the analysts wrote.
“Given the positive developments around VMware and Activision Blizzard clearing regulatory hurdles and closing, we had grown more positive that Adobe would be able to close the Figma deal despite ongoing regulatory scrutiny, especially in Europe.”
They also noted that Adobe’s core creative business remains strong, in their view.
“There were concerns when the Figma deal was announced that maybe Adobe’s creative business was in decline. 2023 financial year results and current prospects indicate a robust and healthy business,” they wrote.
“The initial 2024 financial year digital media revenue guide implies continued double-digit growth at an 11% mid-point. We continue to believe the 2024 financial year guide is conservative, with tailwinds from Firefly AI and price increases likely to crystalize as we go through the year.”
The analysts have a ‘Buy’ rating on Adobe with a US$700 price target.
Adobe shares traded 2.6% higher at US$599.83 on Monday afternoon.