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Adobe (ADBE)
Unnecessary Headaches in the Offing for Adobe
It looks like the summer ennui was getting too much to handle at Adobe. The need to spice things up combined with the release of a less than flattering earnings report seems to have pushed the software company to shell out $1.8 billion to buy a company, Omniture (OMTR: Charts, News, Offers), that offers a tangential product (at best). Adobe if offering a 25% premium to do a deal that CEO Shantanu Narayen refers to as a 'game changer'. If by that he means something that could easily result in him having to vacate his corner office, then sure it's a game changer. A great deal for Adobe it is not and here is why.
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Adobe is known for its creative and design software in addition to Acrobat (yeah that thing you have to put up with when somebody sends you a PDF file). Their flagship product is called Creative Suite and as far as graphic designers are concerned, it is the next best thing to love and fresh air. Given the pullback in media and advertising spending, it was no surprise to see Adobe report a 29% drop in profit on the back of a 21% drop in sales. The acquisition announcement though made people sit up. Omniture, based in Utah, is a web measurement firm. It has software and tools in place which help publishers, advertisers track user behavior online and measure stats of all kind. The bright idea at Adobe is that buying Omniture will allow the company to create a one-stop shop for customers. So say you are a graphic designer working on a new online ad for Dell. Now not only can you create the creative using Adobe's software (e.g. Flash) but you can also use Omniture's technology to measure its performance (e.g. see what kind of people are clicking on the ad and how they are interacting with it).
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This is a slamdunk, how can this acquisition possibly not work? First of all, the web measurement business is not a huge one. The current market size is only about $600 million. Omniture does not have the best record on the street. Last year, the company lost $44.8 million even as revenue doubled to $295.6 million. So Adobe is not getting its hands on a pot of gold or something. Second, there is a lot of competition in the field as numerous web analytics firms compete for the same customers, e.g. Coremetrics and WebTrends. Then there is Google (GOOG: Charts, News, Offers), which offers a somewhat similar product for free. And that leads to the third problem with this deal, it is not clear that web analytics software is something that you can charge for and still have a wide base of customers. As the internet matures, analytics will become more of a commodity with lesser room for differentiation and become more of a given rather some novelty product that people will be willing to pay for.
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Overall, the synergy between the two companies in terms of products or even location (one is based in CA and the other in UT) is not there, no matter how Adobe chooses to spin it. Then there is the price. Why shell out a 25% premium in this weak deal making environment? There couldn't have been a legitimate bidding war brewing so the price is hard to justify. So now, instead of focusing on Adobe's core products, Narayen's attention will be diverted towards integrating Omniture because he is well aware that if it doesn't go well, he could get a one-way ticket out of town.
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What other people think of the deal
Adobe Buys Omniture: What Were They Thinking? -- WSJ is not impressed
Adobe buying Omniture for $1.8 billion -- Some analysts like the purchase
Adobe-Omniture: Some Details From SEC Filings -- Somebody else did the digging for you
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