Adobe Systems to Acquire Macromedia

Adobe Systems Inc. on Monday announced that it planned to buy Macromedia Inc. in an all-stock deal valued at more than $3 billion.

The deal would bring together a pair of California-based companies that are successful in different realms of the publishing software business -- and help both ward off anticipated challenges from Microsoft Corp.

Adobe is best known for photo and design programs and for software that converts documents into so-called PDF files, a kind of universal format viewable on any computer. Macromedia’s products include its Flash animation, widely used on websites and on mobile devices.

“Strategically it makes a lot of sense for both companies,” said research analyst Gene Munster of Piper Jaffray & Co. “Both need to grow -- especially in the emerging mobile market -- and instead of fighting each other in areas where they might not win, they get the proven products in one company.”

But some analysts thought the price, which would provide 0.69 Adobe share for each share of Macromedia, was steep.

“That will not be particularly helpful in the short term,” said financial analyst Drew Brosseau of SG Cowen Securities.

Wall Street reflected that view, sending shares of Adobe down $5.89, or nearly 10%, to $54.77 on Nasdaq. The decline reduced the value of the deal from $3.4 billion, based on Friday’s price, to less than $3.1 billion.

Macromedia shares gained $3.27, or nearly 10%, to $36.72, also on Nasdaq.

The deal, which must be approved by shareholders of both companies and regulators, is expected to close in the fall, Adobe said in a statement.

Macromedia shareholders would end up with 18% of the combined company, which would keep Adobe’s name and San Jose headquarters. Adobe’s chief executive, Bruce Chizen, would remain in that post; Macromedia’s CEO, Stephen Elop, would be president of worldwide field operations.

Adobe is already the clear leader in the print publishing medium with programs that include Photoshop, Illustrator and Acrobat, a document creation program that uses the widely adopted PDF format.

“One of its most important features is that it does not allow text to be changed once it has been sent out,” said analyst Steve Lidberg of Pacific Crest Securities. “In a time when document security is such a priority, that has become more and more important.”

In 2003, Microsoft tried to challenge Adobe’s dominance in electronic documents with InfoPath, a part of its Office suite. But the product failed to take off. “Most people have never even heard of it,” Piper Jaffray’s Munster said.

Analysts suggest that Microsoft will try again, with a new program to be included with the next version of the Windows operating system, which is scheduled to be released in the second half of 2006. Microsoft has not confirmed the speculation.

Macromedia, based in San Francisco, would bring to the deal popular Web publishing programs, including site design software Dreamweaver and Flash, an animation technology that increasingly is being used in the emerging field of creating multimedia files for cellphones.

Adobe CEO Chizen said in a conference call to analysts that the combined company would be able to “offer customers fully integrated solutions for next- generation communication and interaction, especially on non-PC devices.”

Lidberg, of Pacific Crest Securities, said this would be a priority for the combined company.

“The Macromedia product can be used to make the cellphone an entertainment device with video,” he said. “But more importantly, it can be used to make the phone into a corporate communications tool with e-mail, graphics and better viewing of documents. That has a lot of potential for the future.”

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Software linkup

Adobe Systems

* Founded: 1982

* Headquarters: San Jose

* Employees: More than 3,700

* Products: Adobe Acrobat, Adobe Photoshop, Adobe Illustrator

* 2004 revenue: $1.67 billion

* 2004 net income: $450 million

Macromedia

* Founded: 1992

* Headquarters: San Francisco

* Employees: About 1,200 full-time

* Products: Flash, Dreamweaver, FreeHand

* 2004 revenue: $369.8 million

* 2004 net income: $41.5 million

Source: Times research

Los Angeles Times