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Tuesday, April 19, 2005

What's in it for Adobe?

After Oracle and Symantec, Adobe went shopping this week to become another software powerhouse. I know that this is no news to most of you by now but I tried to sleep on it and think about the reasons behind this deal and answer a few simple questions.

What does the deal look like?
Adobe agreed to pay $3.4B in an all-stock transaction, in other words, Adobe agreed to exchange 0.69 shares of its stock for each share of Macromedia. That would result in Macromedia stockholders owning about 18 percent of the combined company when the deal closes. As usual, Adobe's (the acquirer) shares dropped on the news by about 10% while Macromedia's went up by about the same. The deal was labeled as a long-rumored acquisition; I have to confess that I didn't see it coming.

The actual transaction is not done yet, it is contingent upon the approval of regulators as well as the shareholders of both companies, is expected to be completed by the fall. The newco's name will be Adobe and will be headquartered in San Jose, CA.

Adobe is based in San Jose and employs around 3,700 staff globally and has yearly sales of about $1.6 billion while Macromedia is based in San Francisco, employs about 1,200 workers and reported (in 2004) a revenue of $370M.

A small PR website was created to share some details about the two companies getting together.

Who's the new boss?
Bruce Chizen will remain as CEO of the combined company and Adobe's Shantanu Narayen will continue as president and COO. Macromedia's chief executive, Stephen Elop, will join Adobe as president of worldwide field operations. And Rob Burgess, Macromedia's chairman and former CEO, will take a seat on Adobe's board.

What is Adobe after?
Tim Bray from Sun Microsystems couldn't be more pessimistic about this deal. On his blog Tim doesn't think this alliance makes sense. I tried to think about it and come up with possible reasons why Adobe would spend so much change acquiring Macromedia for around 42 times earnings estimates for this year.

The first thing that comes to mind is overlap. Overlap in products (Adobe Illustrator and Macromedia FreeHand in graphics design, Adobe GoLive and Dreamweaver for Web page creation, and Photoshop and Macromedia Fireworks for working with photos), as well as opposing strategies as Adobe was a big supporter of SVG (competes with Macromedia Flash), etc.

Then I started reading about some numbers, especially market shares. According to IDC, Adobe generates about 92% of its revenue from the authoring software market and is fourth in the Web site design market with just under 5%. Macromedia generates about 80% of its revenue from Web site design (2% of Adobe’s revenue) and development tools. Now, the two entities look a little more complementary to me. The new group is clearly going after Microsoft who owns 80% of the authoring software market.

Macromedia's Chief Software Architect Kevin Lynch described the opportunity on his blog: "Many creative professionals and web developers already use our products together, and we will be able to provide an even more efficient authoring and development environment to create, manage and deliver information."

Adobe saw in Macromedia an opportunity to go after new markets as well particularly in the area of providing content to mobile phones and other handheld devices (another area Adobe will be competing with Microsoft and their portable operating system). Macromedia has had success earlier this year in persuading makers of cell phones and other non-PC devices (such as Nokia and Samsung) to embed its Flash technology in their devices. If you believe the serial entrepreneur and owner of the Dallas Mavericks Marc Cuban the PC era is gone, the market needs to be looking at portable and exciting devices. Adobe wants to be a player in this market.

To end this post on a good note, Adobe is expecting strong earnings and sales in the quarter ending June 3 "toward the high end" of its targeted range, citing strong sales for Acrobat. Adobe is so bullish about its future they did something I always like to see companies do, the Board of Directors has approved a post-acquisition stock repurchase program of $1 billion.

Do you believe Adobe will be competing with Microsoft? Do you believe they will be successful in the mobile market with Flash? Do you believe Adobe is much better off with Macromedia than without it? Please share your thoughts about this acquisition.

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