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April 18, 2005

Adobe buys Macromedia to form visual powerhouse

Adobe Systems is to take over Macromedia in a $3.4bn all-stock transaction designed to create an "industry defining technology platform", as the distribution of information extends beyond the PC into a huge range of consumer devices.

By CBR Staff Writer

By combining Adobe’s document creation and collaboration software in particular its Acrobat family – with Macromedia’s web design and animation tools, the two companies believe they can create a software powerhouse set to grow faster than the industry as a whole.

Adobe CEO Bruce Chizen denied the deal could be compared with recent mergers in the software market. It is not about consolidation, but all about growth, thanks to the combination of two healthy companies.

Adobe and Macromedia have been seen as natural partners for a number of years, though Chizen has been wary of big deals. But increasingly friendly exchanges over the past three years between Chizen and his opposite number at Macromedia, Stephen Elop, convinced them the future lay in a combination rather than as competitors.

Elop went so far as to describe the companies as twins separated at birth.

Certainly, the minds of the two CEOs must have been focused by the fact that Microsoft is adding electronic document capabilities to Longhorn, the next generation of the Windows operating system slated for launch in 2006. By then, the new company hopes to be out of sight of the Redmond giant.

The two companies are reluctant to discuss product roadmaps ahead of closing the deal by the Fall. But there is clearly potential for the combination of Adobe’s PDF creation tools with Macromedia’s Flash technology, and the aim is to get their respective software offerings to work seamlessly together.

The two companies also have a similar customer base, with a focus on creative users. With Adobe’s San Jose base close to Macromedia’s San Francisco headquarters, integration is not regarded as a problem.

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Under terms of the deal, Adobe is offering 0.69 of its common stock for each Macromedia common stock. This will give Macromedia’s shareholders a 25% gain on the closing price on Friday and 18% of the combined company.

To emphasize their current buoyant state, both companies issued upbeat trading statements. Due to strong demand for its Acrobat product, Adobe expects its second quarter figures to be at the high end of its target range of $475m to $495m for revenue and $0.51 to $0.55 for earnings per share.

For its part, Macromedia expects its fourth quarter revenue to March 31 to top the forecast it gave in January of $108m to $113m.

The deal is expected to be break even on Adobe’s earnings before exceptional items, and Adobe doesn’t anticipate regulatory objections to the deal. Adobe also plans to sweeten investors by adding $1bn to the amount of its own stock it will buy once the merger closes.

Adobe boasts that half a billion copies of its Reader have been distributed worldwide while Macromedia says that a similar number have its Flash client installed. With the number of devices with internet connections set to soar, especially in the mobile space, it is hardly surprising that Adobe expects to carry on growing faster than the software sector as a whole.

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