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Adobe Pares Gains as Microsoft Deal Speculation Ebbs

Shantanu Narayen, president and CEO of Adobe Systems Inc.
Shantanu Narayen, president and chief executive officer of Adobe Systems Inc. Photographer: Jin Lee/Bloomberg

Adobe Systems Inc. shares gave up part of yesterday’s surge as speculation diminished that the company may be bought by Microsoft Corp.

Microsoft Chief Executive Officer Steve Ballmer recently met with Adobe CEO Shantanu Narayen to discuss closer collaboration, the New York Times said yesterday. Two people familiar with the matter confirmed that the meeting took place at Adobe’s offices in San Francisco. They asked not to be identified because the meeting was private.

“No comment,” Ballmer said today at a conference in Madrid. He added jokingly that “if you are going to do something, you say nothing. So I will be entirely consistent with standard CEO operating procedure.”

While buying Adobe would furnish Microsoft with software-development tools and mobile-phone features, the deal would be expensive and may not pass muster with regulators, said Brent Thill, an analyst at UBS AG in San Francisco.

“High price and antitrust could be hurdles,” Thill said in note to clients yesterday. He has a “neutral” rating on Adobe’s shares and a “buy” on Microsoft. Company executives meet all the time, he said, downplaying the idea that a merger is afoot. In addition, “Microsoft has a spotty M&A track record,” he said.

Up and Down

Adobe fell $1.70, or 5.9 percent, to $26.99 at 4 p.m. New York time on the Nasdaq Stock Market. Yesterday, the shares rose as high as 17 percent, triggering a circuit-breaker halt for five minutes.

Adobe’s software could augment Microsoft’s programming language, .Net, which is the basis for programs that run on Windows, said Katherine Egbert, an analyst at Jefferies & Co. in San Francisco. Microsoft, based in Redmond, Washington, also may need help challenging Apple Inc.’s iPhone and Google Inc.’s Android devices. Microsoft is preparing to release a new operating system for smartphones, Windows Phone 7.

“It makes a lot of sense that they would want to get together,” said Egbert, who recommends buying Microsoft shares. “You’re taking Microsoft’s millions of .Net developers and marrying them to the millions of creative developers who use Adobe’s tools.”

The discussion between Ballmer and Narayen centered on Apple’s control of the mobile-phone market and how the two companies could work together to compete, the Times said. A possible acquisition of Adobe by Microsoft was among the options, according to the newspaper’s Bits blog.

Periodic Meetings

“Adobe and Microsoft share millions of customers around the world and the CEOs of the two companies do meet from time to time,” said Charles Sipkins, a spokesman for San Jose, California-based Adobe. He declined to comment on the “timing or topics of their private meetings.”

Adobe has clashed with Apple CEO Steve Jobs, who banned Adobe’s flash video software from Apple’s mobile devices. Adobe won a partial victory on Sept. 9, when Apple eased restrictions on creating applications for its iPhone and iPad devices. Apple had barred developers from using Adobe’s Flash video software.

Still, the change didn’t let Flash apps run inside the browser on Apple devices, and that’s a larger concern, Jeff Gaggin, an analyst at Avian Securities Inc. in New York, said last month. Apple, which dominates the market for mobile apps, is promoting an Internet standard called HTML5 instead.

The meeting with Ballmer, which included a “small entourage of deputies,” followed informal discussions about a Microsoft acquisition of Adobe several years ago, according to the New York Times.

Adobe forecast sales last month that fell short of analysts’ estimates, sending the shares down the most in eight years. Cash-strapped schools aren’t paying for as many copies of its Creative Suite, which includes Photoshop and Illustrator, the company said. The sluggish economy in Japan, typically Adobe’s biggest Asian market, also hampered sales.

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