Apr 18, 2005

Adobe Systems Agrees to Buy Macromedia for $3.4 Bln

Source: Bloomberg

April 18 (Bloomberg) — Adobe Systems Inc., maker of Acrobat and Photoshop software, agreed to buy Macromedia Inc. for about $3.4 billion, adding programs that display images and sounds on Web pages.

Investors will receive 0.69 share, worth $41.86 at the close of trading April 15, for each Macromedia share, San Jose, California-based Adobe said in a statement today. That values San Francisco-based Macromedia at a 25 percent premium.

The Macromedia purchase, Adobe’s biggest ever, gives Chief Executive Bruce Chizen a broader set of programs to fend off expected competition from Microsoft Corp., which may include more document features in the next version of its Windows software. Macromedia’s Flash, used in 98 percent of desktop computers, also reduces Adobe’s reliance on Acrobat software that forms PDF files.

“It makes a lot of sense,” said Stuart O’Gorman, who helps manage $700 million of technology stocks including shares in Adobe and Macromedia at Henderson Global Investors in London. “It gives them a very broad-based suite of products.”

Adobe shares fell $4.66, or 7.7 percent, to $56 at 9:30 a.m. New York time in Nasdaq Stock Market composite trading. Macromedia gained $4.13, or 12 percent, to $37.58.

Microsoft’s Longhorn

Adobe said it expects second-quarter profit to be at the high end of its forecasts after “strong demand” for Acrobat, which lets users create, view and print documents. Macromedia said fiscal fourth-quarter sales beat its own estimates.

“Macromedia and Adobe have been focused on the mission of helping communities and organizations work better,” Chizen said today on a conference call. “That’s not been a strong suit for Microsoft.”

Microsoft’s next Windows, codenamed Longhorn, is due in late 2006. Chizen, 49, who will remain chief executive officer of the combined company, said the program will have similar features to those offered by Macromedia and Adobe.

“Macromedia’s Flash is a powerful combination,” said Sasa Zorovic, an Oppenheimer & Co. analyst in Boston who rates Adobe and Macromedia “neutral.” “Photos are becoming digital. Video is becoming digital. Newspaper and magazines are publishing on the Web. All these media, they are interwoven.”

Adobe is paying 43.8 times operating profit and 7.5 times sales for Macromedia, according to data compiled by Bloomberg.

Macromedia stock peaked at $120.875 in July 2000 and fell as low as $5.80 in August 2002. In the past five years, the shares dropped 63 percent, compared with a 21 percent increase for Adobe.

Too Few Dollars

The software industry is consolidating. Business-software maker Oracle Corp. bought PeopleSoft Inc. in January. Anti-virus program maker Symantec Corp. is buying Veritas Inc. International Business Machines Corp. last month agreed to purchase Ascential Software Corp.

Adobe Chief Financial Officer Murray Demo, 43, said in an interview last month there are “too many software providers out there chasing too few dollars.” He said “customers basically want to have fewer relationships with software vendors.”

The company expects the transaction to be “break-even to slightly accretive to earnings” in the first 12 months. The deal will close this year. Adobe also plans to buy back $1 billion of stock after the purchase.

Macromedia CEO Stephen Elop, 41, who was promoted from chief operating officer in January, will be Adobe’s president of worldwide field operations. Macromedia, founded in 1992, has 1,500 workers. Adobe, with 4,000 employees, is a decade older.

In January, Macromedia said fiscal third-quarter sales climbed 15 percent to $108.6 million. Net income rose to $15.3 million from $10.3 million a year earlier.

Macromedia said today sales for the three months ended in March exceeded January’s forecast of $108 million to $113 million.

Adobe said last month that profit would be 51 cents to 55 cents a share in the quarter ending June 3 on sales of $475 million to $495 million. First-quarter profit rose 23 percent after demand for Acrobat drove sales to a record.

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