Adobe Systems Incorporated (NASDAQ:ADBE) is best known for its suite of creative tools such as Photoshop, Illustrator, and Indesign, as well as its universal Portable Document Format (PDF) that is widely used to format and share documents.
Several years ago, Adobe made the decision to move its business away from developing and selling shrink-wrapped software, in favor of a software-as-a-service (SaaS), cloud-based subscription business, adding a host of tools that not only serve the creative community, but broader business cases like marketing, advertising, and analytics.
Now the company is adding e-commerce to its tool belt.
Adobe announced this week it was acquiring Magento Commerce, the biggest e-commerce company you've never heard of, for $1.68 billion. The company is a cloud-based e-commerce content management system (CMS) software provider and "brings together digital commerce, order management, and predictive intelligence into a unified commerce platform enabling shopping experiences across a wide array of industries," Adobe said in a statement.
Magento supplies software to design and manage online stores, facilitate purchases, as well as handle payments, shipping, and returns.
The company may not be a household name, but if you have any doubts about its pedigree, you should know that Magento was identified as a leader by Gartner's Magic Quadrant for digital commerce, joining such well-known names as Oracle, IBM, and Salesforce.com (NYSE:CRM). The company also provides a suite of tools designed for business-to-business (B2B) transactions, and it was identified last year as a leader in the field by Forrester Research.
Magento boasts such high-profile customers as Canon, Helly Hansen, and Rosetta Stone, and it has relationships with existing Adobe customers Coca-Cola, Warner Music Group, and Nestle.
Adobe said Magento produced revenue of about $150 million last year, and the company generated gross merchandise volume of $150 billion. The deal, which is expected to close in the third quarter, will be slightly dilutive to Adobe's earnings for fiscal 2018, though it is not expected to significantly affect previously issued guidance.
This is an important acquisition for Adobe, as its supplies the missing e-commerce component, according to Brad Rencher, Adobe's executive vice president and general manager:
As we looked at our current portfolio of Adobe Analytics, Advertising and Marketing cloud offerings, we saw an opportunity to add a next-generation commerce capability to Adobe Experience Cloud. One that could serve both B2B and B2C customers, across physical and digital goods, and provide the flexibility to scale to serve mid-market and large enterprise customers.
This is kind of a big deal
Adobe says the acquisition expands the company's addressable market by $13 billion. Additionally, the tools Magento brings to the table will better allow Adobe to compete with Salesforce, which also offers marketing, sales, and service support for businesses. Salesforce acquired Demandware in 2016 for $2 billion to gain similar functionality to that provided by Magento.
This acquisition also positions Adobe to compete with Shopify (NYSE:SHOP), particularly in the enterprise market served by Shopify Plus. Shopify provides easy-to-use templates for setting up an online store and tools to help customize the shopping experience for customers.
Until now, Magento has primarily focused on small- to medium-sized businesses, but having Coca-Cola in its stable of customers shows the breadth of its offerings. This plugs a gap in Adobe's existing offerings, and the company will now be able to offer insight from the inception of marketing to the close of the purchase.
For Adobe, this deal could be transformative.
Danny Vena owns shares of Adobe Systems and Shopify and has the following options: long January 2019 $165 calls on IBM. The Motley Fool owns shares of and recommends Adobe Systems, Salesforce.com, and Shopify. The Motley Fool owns shares of Oracle. The Motley Fool is short shares of IBM and has the following options: short June 2018 $52 calls on Oracle and long January 2020 $30 calls on Oracle. The Motley Fool has a disclosure policy.