Adobe's Macromedia deal sends Microsoft a message

SAN JOSE, Calif. — By acquiring rival software maker Macromedia in a deal originally valued at $3.4 billion, Adobe Systems is positioning itself to do battle with Microsoft over the tools to create, distribute and manage content online.

The deal, announced yesterday, would put Adobe's ubiquitous Acrobat document-sharing program under the same roof as Macromedia's Flash software for creating and viewing interactive content on Web sites independent of operating systems or devices.

Adobe, which also makes the Photoshop image-editing line and other programs for creative professionals and consumers, also gets the Web site-building application Dreamweaver as well as software for enabling real-time collaboration among business users.

Shares of San Francisco-based Macromedia closed at $36.72 yesterday, gaining $3.27, or nearly 9.8 percent. San Jose-based Adobe's shares lost $5.89, or 9.7 percent, to close at $54.77.

As digital content increasingly finds its way onto cellphones, handheld computers and even televisions, the makers of the tools for working with information are racing to make deals so that their technology is not left out as new standards emerge.

Macromedia has had success in persuading makers of cellphones and other non-PC devices to embed its Flash technology in their devices, Adobe Chief Executive Bruce Chizen said in an interview. Since the start of the year, Macromedia has inked deals with Nokia and Samsung Electronics.

Adobe CEO Bruce Chizen to remain in charge

"Clearly, Macromedia has done a great job both in understanding and gaining value from the non-PC market," Chizen said. That, he added, "is what is very attractive to us."

Besides boosting revenues from software sales and licensing, the combined companies will profit as more developers buy the specialized tools required to create content. They'll also have a greater say in creating standards for new mobile devices.

But Microsoft also has ambitions beyond the PC market it dominates with its Windows operating system, Web browser and other content-playing technology. It offers a simplified version of Windows for both cellphones and handhelds, as well as "light" versions of its Web browser and media player.

In addition, Microsoft is expected to include technology in its next-generation Windows, code-named Longhorn, that could threaten Adobe's dominance with its Acrobat software and the portable document format it invented.

"What they say they are trying to do with Longhorn is similar to what together we are doing," Chizen, 49, said on a conference call with analysts.

Microsoft yesterday declined comment on the deal.

Microsoft is the world's largest software maker, with a market capitalization of $270 billion and revenue of $36 billion last year, compared with Adobe's $13 billion and Macromedia's $2.6 billion.

Microsoft also has been launching programs to help improve collaboration within the workplace.

With Macromedia's Breeze real-time collaboration software, Adobe will be able to offer more of an all-encompassing suite of offerings than it had before the merger.

"At its simplest level, Adobe wants to get into a new content type," said Connie Moore, an analyst at Forrester Research. "At a more strategic level, this puts Adobe in a very different place in terms of competing against Microsoft or Oracle or IBM."

Still, Adobe's move is most likely a pre-emptive move against Microsoft, said Steven Ashley, an analyst at Robert W. Baird & Co. "It makes it harder for Microsoft to challenge Adobe," he said. "As it stands today, they don't compete very much against one another."

The transaction also may raise antitrust issues, said Mark Schappel, a KeyBanc Capital Markets analyst in New York. Adobe's GoLive program and Macromedia's Studio MX, a set of products that includes Flash and Dreamweaver, together would have almost all of the market for software that helps design Web pages, he said.

The combined company will keep Adobe's name and San Jose headquarters.

Until recently, Adobe and Macromedia were bitter rivals, squabbling over the look of the interfaces used in their software. Financial analysts and customers had speculated about a merger for years.

Chizen will remain as chief executive of the combined company, and Adobe's Shantanu Narayen will continue as president and chief operating officer. Macromedia CEO Stephen Elop will join Adobe as president of worldwide field operations. Rob Burgess, Macromedia's chairman and former CEO, will join Adobe's board.

The companies did say there would be cost savings from the deal but did not mention layoffs specifically.

Adobe employs 3,700 people worldwide, including about 450 in Seattle. In 1994, it bought Seattle-based Aldus, the desktop-publishing company that created PageMaker.

Under the deal, which both companies' boards approved, Macromedia stockholders will get 0.69 shares of Adobe common stock for every share of Macromedia common stock. Based on yesterday's closing price, the deal would be worth $3.07 billion.

The $3.4 billion value was based on Adobe's Friday closing price, which represented a 25 percent premium.

Seattle Times technology reporter Kim Peterson contributed to this report. Information about antitrust concerns and Microsoft Longhorn provided by Bloomberg News.