Adobe Patches A Hole With A $600M Purchase

By Stephen D. Simpson, CFA | June 28, 2013 AAA

Make no mistake about what Adobe (Nasdaq:ADBE) management is thinking – the company's legacy digital media business (Creative Suite/Creative Cloud, which includes well-known offerings like Photoshop) is primarily a source of cash flow, while digital marketing/marketing cloud is where the company's future growth will be generated. To that end, Adobe is spending another $600 million to enhance its capabilities and compete more effectively with the likes of Oracle (Nasdaq:ORCL), IBM (NYSE:IBM), and Salesforce.com (NYSE:CRM).

Spending Money To Make Money
Adobe announced Thursday evening that it had reached an agreement to acquire privately-held Neolane for $600 million in cash. While certainly not a household name to most investors, Neolane is an emerging player in marketing management software, with a strong position in areas like lead management and cross-channel campaign management.

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Adobe didn't provide many details, but the general consensus is that Neolane earned about $60 million in revenue in calendar 2012 (with revenue growing 40%), and that Adobe is paying a forward multiple similar (or at least in the ballpark) to what Oracle paid for Eloqua and what Salesforce.com recently agreed to pay for ExactTarget (NYSE:ET), not to mention what Marketo (Nasdaq:MKTO) currently trades for in the market.

A Logical Fit, But There Will Be Some Work To Do
With its capabilities in campaign management, Neolane was a logical buy for Adobe – it wasn't that long ago when Adobe management specifically mentioned that this was an area of weakness for the company, and one where they would consider M&A to improve. Moreover, it's a good compliment to Adobe's existing strength in areas like web analytics, content management, audience optimization, and customer experience management.

Perhaps just as much to the point, the moves made by Oracle and Salesforce.com didn't leave Adobe with a lot of choice if they wanted to continue to build towards an integrated digital marketing platform.

But this is not automatically plug-and-play. As the $60 million in estimate revenue would suggest, this is not a large company, and now its Adobe's job to build the business up in the face of competition from large and well-run software rivals. What's more, Neolane strikes me as more focused/oriented towards on-premise services than hosted/cloud services. I don't think accelerating the transition will be all that difficult for Adobe, but it does offer some integration risk above and beyond the norm.

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Buy Vs. Build – That Will Always Be The Question
I hardly think Adobe (or its rivals) are done building their new marketing businesses. Adobe already offers a lot under its umbrella – from the aforementioned marketing functions to content creation tools and so on. But there's probably still room to add more community/social capabilities, mobile, creation/management, and automation tools.

The key question for Adobe (as well as Salesforce.com, Oracle, IBM, SAP, and so on) will be the buy-versus-build debate. Investors haven't been punishing the acquirers all that much, but there will come a time when shareholders (particularly large institutions) start getting fussy about seeing cash going towards 8x forward revenue acquisitions instead of back to them in buybacks, special dividends, and so on. That could be particularly true in the case of Adobe, where the future margin leverage and competitive dynamics of digital marketing are likely to be quite a bit different than the company's historical experience in digital media.

The Bottom Line
As I expected a deal for a company like Neolane, I can't very well claim that it changes my opinion on Adobe all that much. They paid the going rate and it's a logical deal that fills a few needs for the company. If I have any particular feeling about the move, it's that I wonder what it says about the publicly-traded companies (like Marketo) that Adobe bypassed.

I still believe that Adobe is pretty fairly valued, but that it is also a quality company undergoing a pretty big change in its operating philosophy and long-term goals. I'd reconsider the shares on a pullback, but they don't hold any particular appeal for me today.

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