UPDATE 3-Adobe shares jump on Microsoft buy report

Thu Oct 7, 2010 11:32pm BST

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* Microsoft, Adobe discussed acquisition - NY Times

* Adobe's shares rise as much as 17 percent

* Analyst says deal could make sense (Adds background on Adobe, Microsoft, byline; previous dateline NEW YORK/SEATTLE)

By Bill Rigby

SEATTLE, Oct 7 (Reuters) - Adobe Systems Inc's (ADBE.O) stock skyrocketed on Thursday after a media report stirred speculation it might become an acquisition target for Microsoft Corp (MSFT.O).

The New York Times reported that Microsoft Chief Executive Steve Ballmer had met secretly with Adobe CEO Shantanu Narayen at Adobe's San Francisco offices "recently."

The two discussed Apple Inc's (AAPL.O) dominance in mobile phones and considered several options to counteract that, including Microsoft acquiring Adobe, the newspaper reported, citing employees and consultants involved in the discussions.

The stock rose as much as 17 percent to an intraday high of $30 before settling back. It closed up 11.5 percent at $28.69 on Nasdaq. Microsoft shares were up 0.4 percent at $24.53.

Adobe and Microsoft declined to comment.

Such a deal could be worth $15 billion or more based on Adobe's current market value. It would mark a major offensive in Microsoft's bid for a larger share of Internet media and mobile platforms by getting hold of Adobe's popular Flash player, used by many websites for video and graphics.

An acquisition could make sense, Wall Street analysts said, as a way for Microsoft to integrate graphics and video capabilities into software for new phones and tablet computers, and to counter Apple, whose CEO Steve Jobs has railed against the quality of the Flash player and discouraged developers from using it in applications for the iPhone and iPad.

"It's certainly possible," said Morningstar analyst Toan Tran of a potential deal. "It may be a case of 'the enemy of my enemy is my friend' and both Microsoft and Adobe have a common enemy in Apple. The Flash platform in Microsoft's hands might be an interesting competitive weapon against Apple."

Adobe's shares have been volatile lately, falling 19 percent on Sept. 22 after issuing a lower-than-expected sales forecast [ID:nN21181826] and gaining 12 percent on Sept. 9 after Apple eased restrictions on iPhone and iPad applications [ID:nN09180204].

SEEKING DOMINANCE

Microsoft already has a media player called Silverlight, which competes with Flash, but it has not gained prominence in the market.

Both companies' products compete against programs using Sun Microsystems' Java language, now owned by Oracle Corp ORCL.O, and the emergence of the latest Internet standard HTML5, which promises to eliminate the need for separate media players when viewing video on the Web.

One analyst poured cold water on the report, saying the talks concerned products, not deals.

"Adobe insisted Microsoft abandon Silverlight and instead use Flash," Trip Chowdhry at Equity Research said in an e-mail, citing industry contacts' guess at what happened in the meeting. "Probably no decision got made."

A deal would mark a major offensive in Microsoft's bid for a larger share of Internet media and mobile platforms, as it gears up to launch its new phone software next week [ID:nN01201509] and eyes the introduction of Windows-based tablet computers to challenge the iPad [ID:nLDE69412U] in the coming months.

It would also mean an alliance against Microsoft's archrival Apple, which has been at odds with Adobe over its effective ban on Flash-based applications on its iPhones and iPads [ID:nN29109986].

Such a big deal would be rare for Microsoft, which has almost $37 billion of cash and short-term investments on its balance sheet, but has been shy of big acquisitions since its failed $47.5 billion takeover of Yahoo Inc (YHOO.O) in 2008. Its largest acquisition was the $6 billion purchase of Web advertising firm aQuantive in 2007. (Reporting by Edwin Chan and Bill Rigby; Editing by Leslie Gevirtz and Richard Chang)

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