Adobe Gets Flashy

Recent weakness in the software market appears to be an opportunity for mega-software companies. That is, with lots of cash and market cap, these companies can start buying up smaller prey at cheap prices.

We have already seen a variety of deals, such as Oracle's purchase of Retek. And, yesterday, we got another: Adobe Systems' (Nasdaq: ADBE) purchase of Macromedia (Nasdaq: MACR).

Founded in 1982, Adobe has built a franchise in digital imaging, design, and document technology. Products include standards such as Photoshop, Acrobat, and Illustrator.

In fact, Adobe's financials have been sterling. For 2004, revenues increased 29% to $1.66 billion, and net income rose 69% to $450.4 million. In the past year, the stock has traded from $39.32 to $68.95.

As for Macromedia, it is a younger company, founded in 1992. But like Adobe, it has a multimedia background, with standout products such as Flash and Shockwave. The company also offers Web programming tools, such as Dreamweaver and ColdFusion.

In the fourth quarter, Macromedia posted revenues of $108.6 million, which was a 15% increase from the same period in 2003. Earnings increased 49% to $15.3 million.

So why is Adobe buying a company with slower growth? Adobe sees the future of digital imaging moving toward mobile devices. And, lately, Macromedia has seen strength in this category. For example, the company's Flash mobile platform has more than 1 million customers.

In February, Macromedia signed a deal with Nokia (NYSE: NOK) to license the Flash mobile platform technology. Macromedia also signed a similar deal with Samsung Electronics.

Basically, Macromedia's Flash mobile platform makes it much easier to generate rich content for devices. That is, the tool sets make it easier to render media across different operating systems, processors, and screen sizes.

And the market for rich mobile content is growing at rapid speed, driven by products such as ring tones, video clips, and interactive games from companies such as InfoSpace (Nasdaq: INSP) and JAMDAT (Nasdaq: JMDT).

However, Wall Street is certainly skeptical of the Adobe-Macromedia deal. On the news, Adobe's stock price sank 9.71% to $54.77. After all, integrating large-scale tech transactions is no easy feat.

But, if Adobe succeeds, it would be a win-win for everyone. According to Philippe Kahn, who recently sold his multimedia wireless company, LightSurf, to VeriSign (Nasdaq: VRSN): "Adobe gets an opportunity to take a leadership position and Macromedia's offering gets increased worldwide market presence. This in turn will enhance the opportunities of leading multimedia content providers."

Fool contributor Tom Taulli does not own shares mentioned in this article.