I was emailed by a lot of Adobe fans (and a few employees) as per why Adobe did not make the list of the best stocks of past, present and future. In fact, others wondered why Adobe’s acquisition of Macromedia did not make our list of the best M&A deals?
Adobe’s mission has always been to help people and businesses communicate better. Macromedia’s mission has been to provide a rich media experience. Together, it seemed like a natural fit. But Adode bought out its major competitor, in some ways to “enable the creation and delivery of compelling content and experiences across multiple operating systems, devices and media.” In laymen’s terms, the company of yesterday bought the company of tomorrow: desktop publishing specialist Adobe Systems bought multimedia applications maker Macromedia.
Adobe - which makes the Photoshop and Illustration graphic design programs, amongst many other desktop tools - is a company I have long admired, owned and only recently sold as its stock touched $40 per share. The stock had risen 24% since September, after all. It’s also a stock I would probably get back into at lower levels. Everyone points to the success of YouTube - which uses flash video - as sign that Adobe is invincible. But, the fact is that Adobe acquired flash video in the Macromedia deal, which was not cheap. While Adobe’s CEO Bruce Chizen gets a lot of credit for integrating two widely disparaging cultures, the fact remains that there is much risk on Adobe/Macromedia’s horizon.
- Piracy: Adobe is particularly vulnerable to piracy due to psychological/sociological reasons than, say a Microsoft. MSFT’s clients are businesses who might not want to run the risk of running pirated versions. Adobe, on the other hand (especially its Macromedia unit) has creative clients who might not share such compunctions. I highly doubt a novice web designer will lose sleep over using a borrowed or copied version of Macromedia for example.
- Free web services: Adobe is also very vulnerable because the Macromedia acquisition now makes it compete with a plethora of free web services. Sure, Macromedia is a very compelling suite of applications, but nothing beats free!
For example, when Forbes rants and raves about Yahoo!’s acquisition of Shortcut, whose:
easy-to-use, drag-and-drop interface makes the once-intimidating exercise of editing video footage accessible to an audience far larger than the relatively small pool of tech-savvy video enthusiasts who have editing software on their PCs. Jumpcut enables users to take video clips, photos and other visual content to produce a “movie,” complete with music, sound effects and customized on-screen titles.
Sure, a professional probably might not be caught dead using such free services for newbies, favoring Adobe’s Premiere, for example, but again, nothing beats free… and before one becomes a pro he or she is a novice. By competing with free services, I am not so sure over time Macromedia will become a great acquisiton. This is not a knock against the company or product, au contraire, as an innovator of some of the greatest digital products out there, it was no surprise that Adobe paid $3.4 billion for Macromedia… but imitation is the nicest form of flattery and many free imitators are starting to creep up.
The future of web services is edging towards an open, ad supported model. Right or wrong this strategy is, time will tell. But the signals indicate that consumers will look far and wide to avoid paying for software if they could. Microsoft will probably have a free, ad supported “light” Office productivity system before long.
I am not alone in my reserved feeling on Adobe: An analyst on Thursday recommended investors sell shares of software maker Adobe Systems Inc., calling the stock too expensive and Wall Street’s expectations for new product sales overly aggressive.
American Technology Research analyst Brad Manuilow initiated coverage of Adobe with a “Sell” rating and a $33 price target, suggesting a 17.5% decline in value.
Disclosure: I own shares in YHOO at time of writing. I have owned shares of Adobe in the past.
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