Who’s Watching the Adobe-Macromedia Merger?

2005
Jul
21

As Adobe and Macromedia await word of DOJ rulings on the impending merger and what will become of the companies’ competitive products, both move forward with stockholder votes. But if applications–DreamWeaver, GoLive, FreeHand, FireWorks, or Homesite–have to sell, who is likely to buy?

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As Adobe and Macromedia await word of DOJ rulings on the impending merger and what will become of the companies’ competitive products, both move forward with stockholder votes. But if applications–DreamWeaver, GoLive, FreeHand, FireWorks, or Homesite–have to sell, who is likely to buy?

Adobe and Macromedia logos
If the DOJ says sell, what will be sold and who will buy?

At 3:00 pm PDT on Wednesday, 24 August 2005, Adobe and Macromedia will hold simultaneous meetings to allow stockholders to vote yay or nay on the proposed merger of the two creative application giants. Announced 18 April of this year, San Jose, Calif.-based Adobe Systems, Inc. (Nasdaq: ADBE) plans to acquire competitor San Francisco-based Macromedia, Inc. (Nasdaq: MACR) in an all-stock transaction valued at approximately $3.4 billion.

The proposed merger is still under investigation by, and predicated upon the approval of, the Department of Justice, who requested additional information from the parties on 11 July. The information requested by the DOJ’s Additional Information and Documentary Materials (a “second request”), was specifically related to the two companies’ web design and vector drawing applications, Adobe products GoLive and Illustrator and Macromedia applications DreamWeaver and FreeHand. Web design and construction and vector drawing are the only areas in which the two companies directly compete.

Industry analysts–and would be buyers–are waiting to see whether the DOJ will insist upon the divestiture of one product in both classes prior to approving a merger. Both GoLive and DreamWeaver are actively developed and aggressively marketed as competing applications, and each has a substantial installed user base. In the interest of consumers, the DOJ may require one or the other to be sold before the acquisition as it did previously with FreeHand.

What’s likely to sell.

When Adobe acquired Aldus, then-owner of FreeHand, in 1995. Aldus Corp. was forced to sell FreeHand back to Altsys, its original developer, who was immediately thereafter gobbled up by Macromedia (formerly MacroMind). At the time, FreeHand was a virile and aggressive competitor to Adobe’s Illustrator. Today, however, FreeHand (currently in 2002 “MX” version) is several years out of date, and no longer as strong a competitor to Illustrator in terms of either features or number of installed users. If the information provided by Macromedia to the DOJ reflects these factors, QuarkVSInDesign.com predicts that the DOJ will likely allow FreeHand to be included as an asset of the merger without requiring its sale to a third-party.

Related applications, Macromedia’s FireWorks and Homesite, a vector and raster drawing application and an HTML code editor, respectively, are expected to be non-issues regarding the merger because, even more so than FreeHand, their technologies are outdated and their user markets very small compared to the other applications at issue. Homesite, in particular, which was adopted by Macromedia during its acquisition of Allaire (who had previously purchased it from creator Bradbury Software), has not been significantly updated since Macromedia took ownership of it. Moreover, its functionality is, by and large, already superceded by Macromedia’s own DreamWeaver. FireWorks, originally conceived as a joint competitor to Adobe’s Photoshop and Illustrator, never achieved such a status. Although FireWorks customers are passionately vocal about their application, it’s effective use in the market place is humble.

If the DOJ does take issue with these two applications, Macromedia will likely offer Homesite back to Bradbury Software, who currently makes TopStyle, a stealth competitor to its own Homesite technology. Bradbury, should it reacquire Homesite, will probably kill it off. Having Homesite back in the fold, however, would release Bradbury from the feature restrictions imposed on TopStyle by the company’s deal with Macromedia. TopStyle, a popular and full-featured HTML editor in the guise of a simple CSS code editor, has suffered stunted growth because of Bradbury’s inability to include functions that competed directly with Homesite.

FireWorks, if whose acquisition by Adobe is construed by the DOJ as anti-competitive, may be killed outright as was Aldus’s PhotoStyler, a Photoshop rival in the mid-1990s, or sold for a song.

Who might buy.

Confidential sources reveal that factions within Quark, Inc., the Denver, Colo.-based maker of desktop publishing application QuarkXPress, are pushing for acquisition of FreeHand and possibly even FireWorks in an effort to shore up the company’s market standing against an increasingly competitive Adobe Creative Suite, which includes InDesign, the QuarkXPress competitor, as well as Photoshop, Illustrator, GoLive, and Acrobat. There is also interest there, say sources, in picking up GoLive or DreamWeaver if either hits the open market. Quark has recently strayed from its print publishing roots into online publishing in the form of the QuarkCommerce product as well as HTML creation features of its flagship QuarkXPress layout application. With a full-featured web site development application like GoLive or DreamWeaver, Quark could reinvent itself into the next Macromedia and stake out a territory in cross-platform publishing.

Additionally, Ottawa-based Corel Corp., makers of would-be Illustrator and FreeHand competitor CorelDRAW! as well as other hobby market rivals to Adobe, Macromedia, and Microsoft software, could also be sniffing around FireWorks. FreeHand, though, would be a difficult buy for Corel as such a purchase would also be anti-competitive.

Some speculate that Microsoft, whose timid creative application offerings have so far remained squarely within the personal and hobby use markets, may make a bid for FreeHand, FireWorks, and possibly even GoLive, which is the more likely of the web applications to be divested should such be a condition of DOJ approval of the Adobe-Macromedia merger. The merger is seen by most analysts, including QuarkVSInDesign.com, as a consolidation of power in preparation for war with Microsoft over the mobile content publishing market. Some believe that Microsoft, who has recently gone after Adobe’s almost total domination of the global electronic forms market, may use an acquisition of high-end drawing and web creation software to attack Adobe’s flanks as a distraction from the main battle of mobile device publishing.

Other sources suggest Apple may try to acquire the applications to help it break Adobe’s supremacy of the creative markets, which run primarily on Apple’s Macintosh line of computers. This scenario is, however, unlikely in the opinion of QuarkVSInDesign.com. Such a move would not be consistent with Apple’s strategy of establishing itself as a lifestyle brand innovator.

Given the sizable markets for both DreamWeaver and GoLive, it’s likely that the DOJ will force Adobe and Macromedia to divest itself of one or the other–probably GoLive. Doubtful either would bother Adobe; establishing desktop-level web design dominance is a low priority in the acquisition of Macromedia. And, regardless of who snatches up any other applications the two companies are forced to sell, it’s unlikely the consolidated Adobe could be significantly harmed by the competition.

Both companies are confident that shareholders will approve the proposed merger in the 24 August meetings, and that the deal will close in the Fall of this year.

A joint proxy statement/prospectus will be mailed on or about July 22, 2005 to both companies’ stockholders of record as of July 19, 2005. All Adobe and Macromedia stockholders of record as of July 19, 2005 are entitled to vote on the transaction.

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