The maker of Web-site creation software spared little expense in buying a set of Web-analytics tools it hopes will goose sales
Over an early August dinner in a tree-lined neighborhood of San Francisco, Adobe Systems' (ADBE) executives were candid about the performance of the company's flagship software product. Creative Suite, a package of tools for creating Web sites and print publications, was not living up to its potential, and Adobe would use acquisitions to fuel growth, Adobe management told BusinessWeek at the swank Spruce restaurant in San Francisco's Laurel Village.
CEO Shantanu Narayen said he hoped the next version of the software, which bundles Adobe's popular Photoshop, Illustrator, and Flash, would be popular with big ad agencies and compel smaller customers to upgrade. Adobe makes a broad range of products that help companies produce Web sites, publish online videos, and manage documents and digital files. Yet, "people still aren't aware of the depth and breadth of what we do," Narayen said.
On Sept. 15 Adobe made clear it hopes to become an even broader purveyor of the tools that companies need to thrive in the world of Internet media through its $1.8 billion acquisition of Omniture (OMTR), a maker of software that helps customers measure and analyze Web site traffic. By selling its content creation software alongside Omniture's Web traffic measurement programs—and building technical linkages between the two—Adobe will try to attract more business from companies that want to make Web site design and analysis tools work more effectively together.
With products such as Flash, which helps companies add animation, video, and interactive features to Web sites, Adobe "created these amazing markets from casual gaming to video on the Web," Narayen said in an interview after the deal was announced. Now customers including Nike (NKE), Disney (DIS), and ad agencies such as WPP (WPPGY) want to build methods for measuring Web sites' effectiveness and for tailoring those sites to different audiences as they're building them.
Tool for Negotiating Ad Rates
That's where Omniture's tools come in. The company specializes in software that helps companies quantify the number of people who visit a Web site and chart traffic patterns as a user navigates from page to page. Companies use that data to determine demand for content and negotiate rates with advertisers. Omniture's sales are expected to rise about 15%, to $354 million, this year from 2008, analysts estimate.
Some on Wall Street reckoned Adobe paid dearly for that growth. Shares of the company, which ended up 43¢, or 1.2%, at 35.62 on Sept. 15 in normal trading, fell more than 4% in extended trading after Adobe announced the acquisition and reported that fiscal third-quarter revenue fell 21%, to $697.5 million, even as earnings of 35¢ a share beat analysts' estimates by a penny. Adobe said buying Omniture would add to earnings, when calculated not according to generally accepted accounting principles, in fiscal 2010, which begins on Nov. 28.
Omniture's stock soared in extended trading, gaining 25% after closing up 33¢, or 1.9%, at 17.33. Adobe's cash offer of $21.50 a share is a premium of 24% above Omniture's closing price and 94% above where the stock was trading about two months ago. That represents a "considerable" win for Omniture shareholders, said Scott Kessler, an analyst at Standard & Poor's Equity Research, in a Sept. 15 research note. Kessler also raised his rating on Omniture's stock to a hold. S&P, like BusinessWeek.com, is owned by the McGraw-Hill Companies (MHP).
Adobe will use the deal to try to tack on more revenues. During the San Francisco dinner, Chief Financial Officer Mark Garrett said sales of upgrades to the company's Creative Suite 4 were "nowhere near where we thought they would be" as companies held off during the recession on buying new PCs and the associated installed software. Weak sales of design software were a big reason Adobe's sales slid during its third quarter.
Big Challenge? Google
But Adobe will need to surmount two problems as it sells Omniture's Web site analysis products to its sizable customer base. One is awareness. Although Omniture boasts some 5,000 customers, it hasn't been able to reach the most influential marketers in companies as effectively as it would like. "In many cases, we're struggling to get chief marketing officers to understand who we are," says Omniture CEO Josh James. "They all know who Adobe is."
The other challenge is Google (GOOG), which makes a set of software tools called Google Analytics available for free and introduces technical improvements about twice a year. "They continually raise the bar for Web analytics companies," says John Lovett, an analyst at Forrester Research (FORR). Yahoo! (YHOO) also offers free Web analysis software.
U.S. companies will spend $431 million on Web analytics software and consulting this year, Forrester estimates, and the category could grow 17% a year through 2014. Adobe hopes it can snare enough of that market expansion to keep investors happy while it rebuilds its ailing Creative Suite franchise.