Tuesday, April 26, 2005

Adobe Makes Flashy Merger

On April 18, 2005, the computer document-sharing company, Adobe Systems, Inc., agreed in principle to purchase Macromedia Inc, a digital animation software and design company for $3.4 billion in stock. Adobe’s primary software package consists of the Acrobat program used to create and read documents in the PDF format and the popular Photoshop program used with digital photographs. Macromedia’s expertise has stemmed from its software packages Dreamweaver, used for web page creation and Flash, which animates and adds interactivity to web pages. The deal is designed to help Adobe increase market share with publishers, advertisers and web users, who create and distribute electronic documents. In addition, Adobe can leverage the current software packages of both companies to expand into the new venture of providing content via wireless phones and various other hand-held devices. This deal follows the latest consolidation move in the software sector of the likes of Symantec’s acquisition of Veritas and Oracle’s purchase of PeopleSoft. However, according to Bruce Chizen, Adobes Chief Executive Officer, “This is not a consolidation play. This is all about growth. We’re doing this because we believe the combined offerings will be even more compelling to our customers given the challenges they’re going to face in trying to communicate information in this very complex environment.”

Executives within both organizations have developed very similar goals for their respective companies. The two companies realized that they could form synergies to venture their business into new markets, while leveraging their existing products. As primary competitors, both companies distribute similar products, and this uniformity will result in the consolidation of some software packages. The programs that are similar to each other are Photoshop and Macromedia Fireworks for photographic related programs, Adobe illustrator and Macromedia Freehand for graphic design, and Adobe GoLive and Dreamweaver for Web page development. Thus, the merger will result in a cost savings for the consolidated company, making services and products that will be streamlined to incorporate the best features of products to better serve customers. However, Drew Brosseau, SG Cowen analyst, commented that this product overlap may cost Adobe its stock premium.

There are definite advantages to this merger, which has yet to be approved by the Securities and Exchange Commission. The fact remains that these are two giants in their industry, who have competed with each other bitterly in the past. They both possess considerable strengths in their various products and technologies, which will supplement the merged entity by creating a broad and diversified product line. With the technological capabilities that each organization possesses, the combined company can grow faster than as individual entities. In addition, with the advent of technological advances in cellular phone and PDA’s, the software packages including flash that Macromedia has been developing will enable the merged company to reap the benefits in the near future.

The possible disadvantages that could occur are common to any large corporations attempting a merger. First, the cultures of the two organization may not join together to form a cohesive working unit. Will Macromedia’s employees adhere to the culture of Adobe who will be the absorbing organization? Second, will the two companies be able to eliminate duplication of efforts appropriately to reduce costs and find a process capable of creating quality products? Currently both companies create similar software packages with their own customer base. It will be a challenge to determine which packages to eliminate, consolidate, and retain. Third, will this merger bring about increased competition now that only one predominant player exists and how will they deal with it?

Once all synergies for the organization are put in place, it is our belief that the “new” Adobe will be a player to be reckoned with. This is clearly a strategic merger. Adobe has a broad product portfolio of applications, and Macromedia can pave the path for Adobe’s products in new era of PDA’s and cell phones. They clearly have quality leadership, software packages and an up and coming technology in the pipeline to take the re-organized corporation confidently into the future. There are three non-Microsoft platforms that are critical in web applications: Flash, PDF, and Java. Now, two of them are merging. This could be Adobe’s move to fortify itself just as Microsoft is getting ready to release its new operating system codenamed “Longhorn” that includes a software package to rival Acrobat. Individually, Adobe and Macromedia might have been too small to combat Microsoft. Will this merger wake up Microsoft to do something about the merged Adobe?

Daniel Chi, Arun Mohanchandra, Arvind Ramanathan

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