By Matt Hines
Tuesday, April 19 2005 08:52 AM
URL: http://www.zdnetasia.com/news/software/0,39044164,39226479,00.htm

Desktop publishing specialist Adobe Systems is buying multimedia applications maker Macromedia in a US$3.4 billion deal geared toward building a software powerhouse.

The all-stock deal, announced Monday, is designed to create a better-stocked source of tools for building and distributing multimedia content across a range of operating systems and devices, the companies said. They also stressed that the merger will enable them to expand more rapidly into the market for audio and video applications for handhelds and other gadgets.

In a conference call, Adobe CEO Bruce Chizen said that the buyout creates a more robust company capable of delivering new technology into a number of emerging markets.

"This acquisition strengthens Adobe's mission of helping people and organizations communicate better," Chizen said. "Whether it is documents, images, the Web, TV or new wireless and other non-PC devices, the methods we use to access this information continue to evolve."

Market reaction to the deal was mixed. In morning trading, Adobe was down US$7.22, or 12 percent, to US$53.44. Macromedia was up US$2.55, or 8 percent, to US$36.

Adobe is best known for its PDF, or Portable Document Format, technology for presenting text files online. Macromedia's flagship product is the Flash animation software.

Chizen said the combined entity will be able to serve a wider audience than either company currently reaches and deliver new tools and services to content developers as the multimedia software sector evolves.

"The formats and standards governing communications methodologies are rapidly changing, and the creators of this information are challenged with how they cost-effectively create, deliver and manage that information," Chizen said.

In an interview with CNET News.com in February, Chizen discussed San Jose, Calif.-based Adobe's shift toward providing software for big companies and the shadows cast by software makers Microsoft and Apple Computer.

"If you just look at the number of government agencies around the world that already encourage the use of PDF and accept it as a de facto standard, it's pretty hard for me to see how Microsoft's going to come in and just unseat all those workflows," he said at the time. "But they are Microsoft and they do have US$40 billion in revenue."

Under the terms of the deal, Macromedia's shareholders will receive 0.69 share of Adobe stock for each share of Macromedia stock. Based on Adobe's closing price of US$60.66 on Friday, each Macromedia share will be worth US$41.86. The deal represents a 25 percent improvement for Macromedia shareholders, based on the US$33.45 closing price of the multimedia company's stock Friday.

In the combined company, Chizen will remain Adobe's CEO, and Shantanu Narayen will retain his position as president and chief operating officer. Macromedia's president and CEO, Stephen Elop, will join Adobe with the title of president of worldwide field operations. Rob Burgess, chairman of Macromedia's board of directors, will join Adobe's board.

Elop, who has been an executive with San Francisco-based Macromedia since 1998, said the merger will allow the combined company to expand its reach into new areas of multimedia authoring, with a growing emphasis on bringing his company's Flash graphics presentation format into new devices. Along with added resources, the executive said, Adobe will provide Macromedia with a range of potential customers.

"By focusing on more complete solutions that utilize our platform, and by interacting on an enterprise footing with our largest customers, we have been able to expand Macromedia from being not only a supplier of great software but also a strategic vendor to a growing number of customers," Elop said. "It makes sense to do this today because we are doing well."

Adobe's financial team said that based on a number of similarities between the two companies, it expects some cost savings once the companies are combined.The financial team did not supply further specifics but did say the combined entity will be "built on Adobe's infrastructure."

In conjunction with the deal, Adobe announced plans to repurchase US$1 billion in stock after the Macromedia acquisition is completed. The transaction is expected to close later this year.

In combination with the acquisition announcement, Adobe reported that its second-quarter earnings and revenue will reach the high end of its previous guidance, based on strong demand for its flagship Acrobat desktop publishing software. In March, Adobe announced estimates of 51 cents to 55 cents per share, on revenue of US$475 million to US$495 million.

Macromedia said it expects to exceed its previous revenue guidance of US$108 million to US$113 million for its fiscal fourth quarter, which ended March 31.