Rumor or No Rumor, Microsoft Should Buy Adobe This is how rumors get started. Microsoft (MSFT) CEO Steve Ballmer, entourage in tow, showed up recently at Adobe's (ADBE) offices in San Francisco for a secret meeting with its CEO Shantanu Narayen. Only the secret meeting turned out to be not so secret.

Reporter Nick Bilton spilled enough details on The New York Times site Thursday to send Adobe's stock rallying 12% to $28.69 by the end of regular trading hours. In after hours trading, the stock had held onto the gains. Bilton, citing employees and "consultants" to both companies involved in the discussion, noted that
"one of the main thrusts of the discussion was Apple and its control of the mobile phone market and how the two companies could team up in the battle against Apple. A possible acquisition of Adobe by Microsoft were among the options."
"Thrusts" may not be the most politic word to describe talks between companies contemplating a corporate marriage. But never mind that: These are two companies that belong together. The mobile Web is the future Web. And the mobile Web of the future will stream content either through:
  1. the native apps that already dominate Apple (AAPL) iPhones and Google's (GOOG) Android phones, or;
  2. a nascent generation of mobile browsers that employ features developed under the umbrella of HTML5.
In other words, at this point, the future is a raucous party to which neither Adobe's Flash nor Microsoft's Silverlight has been invited. iPhone apps and browsers with HTML5 features won't kill Flash or Silverlight, but they'll do something far more painful: make them irrelevant without killing them, forcing Microsoft and Adobe to invest heavily in those products in the vain hopes of getting into the party.

But taking the nearly ubiquitous chocolate of Flash and sticking it inside the much smoother peanut butter of Silverlight just might produce a tastier treat to bring to the table. That is to say, Flash might improve under Microsoft engineering. (It couldn't get worse). If that happened, it could spur competition in the race to develop a better way to deliver content over the Web. And that would be a good thing for Apple and Google, as well as consumers.

Office and Creative Suite: A Match Made in Hard Drive Heaven


This is one reason why Microsoft and Adobe need each other and why Ballmer was knocking on Narayen's door. But there's another reason that is perhaps just as strategically important to both companies.

Adobe's bread and butter has been its multimedia software, notably its Creative Suite applications that include Photoshop, Acrobat and others. Creative Suite is a logical complement to Microsoft's Office suite of productivity software.

Few are the companies -- large or small -- that rely on Office without also using a multimedia program like Photoshop, or vice versa. The merging of the Creative Suite into Office would instantly upgrade a stale software bundle that peaked around 2005 (and has since been matched by Google Apps and freeware apps like OpenOffice) into a package of programs that companies might pay a premium for.

Echoes of Microsoft's Monopoly Days

There are reasons why this deal may not happen, starting with a likely objection by the Justice Department on antitrust concerns. As The New York Times pointed out, Microsoft and Adobe discussed a merger a few years ago, but it went nowhere because Microsoft was worried such a deal might tangle it in yet another regulatory snarl.

But the environment has changed so much in the last couple of years that the thought of Microsoft buying Adobe is more likely to causes eyes to roll in cynicism than to widen in fear. Office users may recall Microsoft's past bullying tactics, but history has marched on. Today, Apple and Google appear the likelier monopoly threats, while Microsoft -- with or without Adobe -- is an outlier hoping to offer competition.

The stock market has seemed resigned to a Microsoft takeover of Adobe. For the past two years, ever since the banking crisis drove stocks down uniformly, the two stocks have traded in tandem -- until two weeks ago, when Adobe's guidance indicated its Creative Solutions business would grow weaker. The news caused Adobe's stock to fall 19% in one day, and just have may have left the stock cheap enough for Steve Ballmer to pick up the phone.

As long as Adobe's stock has a 12% premium from the merger rumors, you have to wonder who leaked this story out. It couldn't have come from Microsoft, since it would just have made a logical deal that much more expensive. It might have come from an Adobe shareholder, distressed about the stock's recent plunge. Or, much less likely but intriguing to consider, it could have come from "consultants" who also work with Apple or Google, companies that would benefit if this deal never happened.

But again, that's the thing about rumors, once they get started: They're usually so vague they inspire all kinds of what ifs. Maybe Adobe's share price will rise so high Microsoft will opt for some kind of joint venture instead of an outright acquisition, as it did with Yahoo,

That would be too bad for both companies and their shareholders. Unlike Yahoo, Adobe is an acquisition that would fit much more sensibly into Microsoft's plans for the next few years.

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