Shares of Adobe Systems surged 12 percent Wednesday after rival Quark said it was interested in buying the struggling desktop software publisher.
Quark officials made an offer to Adobe's board of directors on 18 August to buy a "significant interest in Adobe at a premium," then made their bid public Tuesday after Adobe's board rejected it.
On Wednesday, Adobe (ADBE) replied that it rejected the unsolicited bid because Quark did not specify a purchase price.
Adobe, headquartered in San Jose, California, also maintained that its troubles, including slower-than-expected sales growth, are only temporary. The company's investors and employees have "exciting opportunities" on their own, the company said.
"I don't think [the deal] is going to work out," said Ulysses Yannas, an analyst at Mercer, Bokert, Buckman & Reid.
Nevertheless, Adobe's shares surged, partly on expectations that another company -- maybe International Business Machines (IBM) or Eastman Kodak (EK) -- could step in and make a bid, analysts said. Adobe closed up US$3.62 at $27.62. Earlier, it traded as high as $28.38.
Quarky
Analysts were skeptical that privately held Quark could pull off the acquisition. Although Quark has never disclosed its financial results, market analysts suspect Quark is much smaller than Adobe in terms of revenue. Based on Adobe's stock price, Quark would have to pay at least $1.89 billion in cash, if it were forced to go to Adobe shareholders directly.
In a February press release, Quark said it had set aside $200 million to make acquisitions and investments. It didn't specify where it would get the rest of the money to buy Adobe.
"We believe we have the resources necessary to make this happen," said Tim Gill, chairman, founder and chief technology officer of Quark. "The key ingredient we are missing is to entertain Adobe."
Gill wouldn't elaborate on exactly what resources would pay for an acquisition. But he said there are "different ways it could play out," including Quark buying a lesser interest in Adobe. "I think we need to have discussions with them and see what might be of interest."
Gill said his company wants to give Adobe's board some time to mull over a potential deal. "I think it could make a combined company that was very, very attractive" to investors.
Still, it's unlikely Adobe would agree to be acquired by a smaller company.
"It's a classic case of a minnow trying to swallow a whale," said Aaron Scott, analyst at Sands Brothers & Co.
Analysts speculated that Quark is looking to increase its market share in the desktop publishing industry, a business that's facing much slower growth rates than in the mid-1980s.
If it could somehow convince Adobe shareholders to go along, Quark also would have to figure out how to circumvent antitrust concerns.
Adobe and Quark are the two biggest vendors of desktop publishing and page-layout software, the programs that help magazines and newspapers compose their pages. Quark would have to either divest its own QuarkXPress page-layout product or sell off Adobe's Pagemaker to please antitrust regulators. But neither option would be palatable to shareholders.
"Yeah, let's divest the cash cow, Pagemaker," said Joan-Carol Brigham, analyst at research firm International Data Corp. "It's a harebrained thing."
Adobe also has a "poison pill" plan, which would make a hostile takeover prohibitively expensive for an uninvited suitor.
But Adobe might need to partner with another company in the end, said Mary McCaffrey, analyst at BT Alex. Brown.
"Adobe has really been a roller coaster ride," she said. "You are going to get people anticipating bidding from other companies. They should think about selling the company."
Possible suitors include Xerox, Kodak, IBM, and Hewlett-Packard, she said.
Adobe under fire
Regardless of whether Quark proceeds with its bid, Adobe must quickly figure out how to turn its business fortunes around.
Earlier this year, it released new versions of several key products, including Premiere and Photoshop. Upgrades usually boost software companies' revenues significantly.
But two weeks ago, Adobe said it would cut 300 jobs, or 10 percent of its work force, and give three executives the boot to cope with declining sales in Japan. It also said it might report a loss in the third quarter.
In the most recent quarter, Adobe reported profit from operations of $29.3 million, or 43 cents a share, on revenue of $227.3 million. Revenue for the period ended 29 May was flat, despite the release of new products.
Adobe can return to its "historic profit levels" in coming quarters, said Adobe President Charles Geschke in an interview.
"We are an extremely healthy company," he said.
Adobe turned Quark down because it said Quark didn't technically make an offer. "There's nothing to respond to," Geschke said.
If Quark does spell out its acquisition plan, Adobe would have a responsibility to "take a look at it and make a response," said Geschke, adding that he saw no value in the deal.
"What they talked about in their letter was getting rid of some of our products, which would eliminate competition in the marketplace," Geschke said. "This is not in the customer's best interest."
Geschke said no other companies have approached Adobe.
Adobe could recover without being acquired, but it would take some effort, analysts said.
"It's possible, but they've got to make changes," said Scott. "They've got to come out with new blockbuster software."
Adobe will release a new version of Illustrator in September, and will focus on software that prepares text for both print and the Web, said Geschke.
"Expect to hear more as we enter '99," he said.
