October 8, 2010

Secret Meeting Spurs Stock Surge For Adobe

Shares of Adobe Systems Inc. quickly surged on Thursday after reports came to light that Microsoft Corp might acquire the San Jose, California-based software firm.

The New York Times reported that a secret meeting between Microsoft's CEO and Adobe's CEO took place at Adobe's offices "recently." The two chief executive officers discussed Apple's dominance in the mobile phone sector and considered various options to counter that, which including Microsoft buying out Adobe, according to the newspaper report, which cited employees and consultants involved in the meeting.

Such a deal could be worth at least $15 billion based on Adobe's market value. It would give Microsoft a major boost in the bid for a larger share of Internet media and mobile platforms by getting the rights to Adobe's popular Flash player.

Wall Street analysts see the potential deal as making perfect sense, as it would give Microsoft a way to integrate the popular video and graphics capabilities into software for new phones and tablet computers.

A deal is certainly possible, Morningstar analyst Toan Tran told Reuters. "It may be a case of 'the enemy of my enemy is my friend' and both Microsoft and Adobe have a common enemy in Apple. The Flash platform in Microsoft's hands might be an interesting competitive weapon against Apple."

Adobe's shares have been unstable as of late, gaining 12 percent on September 9 after Apple eased restrictions on its iPhone and iPad applications, and then nose-diving 19 percent on September 22 after issuing a lower-than-expected forecast.

With the news of a possible acquisition by software giant Microsoft, Adobe stocks rose as much as 17 percent to an intraday high of $30 before closing up 11.5 percent at $28.69 on NASDAQ. Microsoft shares were up 0.4 percent at $24.53.

Microsoft's Silverlight, which competes with Adobe, has not gained much market prominence. Both companies' products compete against programs using Sun Microsystems' Java language, and the latest Internet emergence HTML5, which promises to eliminate the need for separate media players when viewing video on the web.

"Adobe insisted Microsoft abandon Silverlight and instead use Flash," Trip Chowdhry at Equity Research said in an e-mail, citing industry contacts' guess at what happened in the meeting. It is unlikely any decisions were made, he noted.

A deal with Adobe would help Microsoft's attempt to carve out a larger market share of Internet media and mobile platforms, as it gets ready to launch its new phone software next week. It would also help in Microsoft's bid to introduce a Windows-based tablet computer that would challenge the iPad in the coming months.

The acquisition, if it does occur, would be a rare deal for Microsoft, which has nearly $37 billion in investments currently, but has been shy of big acquisitions since its failed $47.5 billion takeover of Yahoo in 2008. Its largest takeover was the $6 billion purchase of web advertising firm aQuantive in 2007.


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