Update: Adobe to buy Macromedia for $3.4B

IDG News Service - Adobe Systems Inc. has reached a definitive agreement to acquire Macromedia Inc. for $3.4 billion in stock, the company announced today.

The deal would combine the companies' document management, Web publishing and online video delivery tools, putting Adobe squarely in the path of rival Microsoft Corp., analysts said.

San Jose-based Adobe and San Francisco-based Macromedia have some of the most widely distributed software in the world. Adobe's Portable Document Format (PDF) and Acrobat Reader software is common on most desktops, and Macromedia's Flash products are widely used to create and view animation, video and other content.

The Macromedia name will live on as a software brand, but the merged company would be called Adobe Systems, company executives said during a conference call with analysts and press.

While the companies hope to realize cost savings in the first year of combined operation, in the long term the deal is all about growth, they said.

"I see this as both companies bulking up against Microsoft," said Steven Brazier, an analyst at Canalys Ltd. The first step will be both vendors supporting each other's formats, and Adobe will likely start integrating Flash into its products, Brazier said.

Adobe has traditionally been strong in the off-line graphical design business, such as desktop publishing, while Macromedia has a presence in graphical user interfaces for the desktop with its Dreamweaver and Flash products. The merging of these two businesses would give Adobe new capabilities for delivering rich media tools, analysts said.

During the conference call, analysts repeatedly raised the question of a possible antitrust investigation of the market for illustration tools like Freehand and Illustrator, but company executives dismissed the possibility.

"There's a lot of competition in the market. CorelDraw outsells both of us in Germany, and there are open source products like Killustrator. We don't see it as an issue," said Adobe Chief Financial Officer Murray Demo.

There may be more for antitrust authorities to worry about than Demo thinks, however: the developer of Killustrator changed the project's name to Kontour after being threatened with legal action. Kontour was distributed as part of the KOffice desktop software suite, but development of Kontour has been stopped, according to the Web site of the KOffice project.

Adobe also stands to benefit from Macromedia's base of ColdFusion Web developers, allowing it to integrate and automate new offerings, according to RedMonk LLC analyst James Governor.

Governor predicted that dynamic forms that allow users to create, change and share information online will be one of the first products of the marriage. Graphics automation is also in the cards. Both of these