knocking on the door, and Wall Street demanding evidence that its growth engine is not out of steam,
has pulled off software's latest megamerger: a $3.4 billion stock swap to acquire
Although analysts who follow Adobe were quite positive, Wall Street's initial reaction on Monday was not. Investors worried about the 25% premium Adobe offered Macromedia shareholders, and apparently thought that the company's estimate of the merger breaking even or making a small profit after 12 months was too conservative.
Adobe's stock was off $5.52, or 9%, to $55.14 a share in recent trading, while Macromedia had gained $3.45 a share, or 10.3%, to $36.90.
The friendly deal will combine Adobe -- the leader in document software management and photo-editing tools, such as Acrobat and PhotoShop, with much smaller Macromedia. San Francisco-based Macromedia makes design software Dreamweaver and Flash, a tool that makes it relatively simple to add video and animation to Web sites.
Already approved by both boards, the deal offers Macromedia holders 0.69 Adobe share for each Macromedia share, or about $41.86 in stock at Friday's closing prices. Adobe holders will own 82% of the combined company. The deal must also win regulatory approval, but since there is so little overlap between the products of the two companies, the government is not likely to object.
Although its stock has done remarkably well and the company has continued to grow, Adobe's core markets, particularly in photo editing and video, have become extremely competitive. A combination with Macromedia will allow the company to move into new markets.
"We believe the non-PC market, including mobile phones, will be the fastest-growing content-distribution avenue in 2005 and beyond," Piper Jaffray analyst Gene Munster said in a note to clients. "Macromedia's Flash Lite gives Adobe the pole position in this high-growth market," said Munster, whose company does not have a banking relationship with Adobe or Macromedia.
Microsoft, meanwhile, has added document management capabilities to its Office suite in hopes of challenging the seemingly ubiquitous Acrobat program, and it's expected to add even more when Longhorn, the next version of Windows, debuts in late 2006.
Unlike the hostile takeover of
, this merger isn't likely to result in massive firings, said Adobe CEO Bruce Chizen. And unlike the pending merger of antivirus maker
and storage software vendor
, the companies are in relatively similar businesses, which will make integration of the workforces and cultures much easier, albeit challenging.
Prudential analyst Brent Thill, whose firm has no banking relationship with either company, said there are "significant opportunities" for Adobe to pull up Macromedia's lower margins. Operating margins for San Jose, Calif.-based Adobe last calendar year were 35.5%, while Macromedia posted a margin of 15% in fiscal '04.
Chizen will remain as chief executive of the combined company, and Adobe's Shantanu Narayenb will continue as president and chief operating officer. Macromedia CEO Stephen Elop will join Adobe as president of worldwide field operations.
Adobe also set a $1 billion post-deal buyback plan and guided toward the high end of its second-quarter guidance, which calls for earnings of 51 cents to 55 cents a share on revenue of $475 million to $495 million.