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When Adobe (ADBE) announced its intention to acquire Figma for $20.0 bln last September, the response from investors was anything but positive as shares tumbled by 17% that day. A disappointing Q3 earnings report added some fuel to that fire.

• The unpopular acquisition is under the spotlight again today, sending ADBE shares lower, but this time the news is creating a cloud of uncertainty over the deal. Specifically, Bloomberg reported that the U.S. Department of Justice is preparing a lawsuit to block ABDE's purchase of Figma due to anticompetitive concerns. According to the report, a lawsuit could be filed as early as this March.
• For some quick background, Figma provides a platform that's mainly used to design website interfaces or applications, although it can be used to create many other items like logos, product prototypes, and social media posts.
• As a private company, there's only limited data available regarding its financials and growth. However, ADBE did provide some metrics when it announced the acquisition, disclosing that Figma was on track to add $200 mln in net new ARR this year, bringing its total ARR beyond $400 mln exiting 2022. Additionally, Figma boasts very high gross margins of about 90% and is generating positive operating cash flows.
• It's easy to see why ADBE was attracted to Figma as the company would be a natural fit, greatly expanding on ADBE's existing collaborative design product called XD. In essence, ADBE would be taking its largest competitor off the map in this market, which is why the deal is under scrutiny from regulators. ADBE argues that Figma doesn't compete against its largest applications, such as Photoshop and Acrobat, suggesting that the overlap between the two companies is minimal.
• The U.S. Department of Justice apparently isn't the only agency that may disagree with that assertion. Overseas, the European Union antitrust agency and the UK Competition and Markets Authority are also taking a closer look at this deal. ADBE tried to offer a reassuring tone this morning, stating that it continues to expect the acquisition to close in 2023, but that is looking increasingly unlikely.
• Given that this deal could very well far apart, it's a bit surprising that the stock is reacting so poorly to this development. Investors understandably balked at the $20 bln price tag last September. At that valuation, ADBE is paying about 50x trailing ARR.
• Not only did it seem like ADBE was overpaying for Figma -- which was valued at about $10 bln earlier in 2022 -- but the company also planned to finance half of the deal with stock. Unsurprisingly, the transaction is expected to be dilutive to EPS in the first two years due to the lofty price tag and the new stock issuance.

We believe it's the uncertainty and the prospects of a long, drawn-out legal process that's hanging over the stock today. The concerns and implications regarding the acquisition were already baked into the stock. Now, investors need to go back to the drawing board and reconsider what ADBE's prospects look like without Figma in the mix. Although ADBE is coming off a pretty solid Q4 earnings report, its growth rates have been sputtering, slipping to 10% from 13% in Q3 and 14% in Q2. As much as the purchase price rubbed investors the wrong way, at least Figma would provide a major shot in the arm for ADBE's growth.