QUARK BID FOR ADOBE MAY HAVE HIDDEN TOLL FOR PAPERS

Spurning takeover will distract a key software firm at a critical juncture

We usually leave the discussions of technology to our sibling newsletter, The Cole Papers. But last week's revelation that Quark Inc. was making an unsolicited bid to completely acquire – or at least control – Adobe Systems Inc. is more of a business story than one of technology.

It's a newspaper business story because Quark and Adobe are the two leading suppliers of newspaper pre-press software.

Denver-based Quark, purveyors of the popular page layout program XPress, is seeking to control San Jose-based Adobe, which through acquisitions now develops and sells PageMaker, the pioneering product in the page layout software market segment, as well as FrameMaker, a long-document layout program.

Despite being one of the earliest proponents of XPress (in 1987 a group of us chose it for use at the San Francisco Examiner), I have always been surprised that the newspaper industry has so uniformly rallied around the program. PageMaker, after all, was developed by a company run by newspaper refugees.

Nonetheless, Adobe (and desktop publishing pioneer Aldus before it) had done little to entice newspapers to PageMaker. At the same time, Quark was slavish in its attempts to woo the newspaper and magazine industries. Today, the ratio in newspapers is probably 90-10, in Quark's favor. That ratio gets higher in mid- to large-size dailies.

So, why would Quark be interested in acquiring Adobe? The answer is simple: K2. That's the code name for Adobe's latest page layout software, which has been in development for 18 months.

Scheduled to be delivered sometime in the first quarter of 1999, it is alleged that K2 (named after the second-highest peak in the Himalayas, which is, of course, higher than Denver) will have a variety of features that Quark XPress does not: object orientation (yielding smaller file sizes and less network traffic), modularity (for easier integration with standard word processors) and integrated support for Adobe technologies such as Photoshop, Illustrator and Acrobat (the portable document format, or PDF, application).

Quark even patiently explained to Adobe what it would do: "We would commit to divest, to one or more viable third parties, Adobe's K2 and PageMaker products and, to the extent required to complete the transaction, we would be willing to consider divesting Adobe's FrameMaker products as well as any other product which would present regulatory issues," Quark CEO Fred Ebrahimi said in a letter to the Adobe board of directors.

No matter how "viable" a third party the combined Quark/Adobe would find, it would never have the marketing clout of Adobe as it is constituted today.

In other words, Quark is trying to kill K2. And it may succeed – if not in inflicting death outright, at least in wounding K2.

The Quark run at Adobe specifies "a cash price that would be a premium to Adobe's current trading level." The market capitalization of Adobe is roughly $2 billion. A "premium" on $2 billion is serious change – probably more serious than Quark has on hand.

Adobe will have a tough road for the next few weeks (if not months). The stock was at a 52-week low when the Quark announcement was made, and investors – both institutional and independent – will be clamoring for increased value.

Adobe's problem will be to convince investors that this is the company's nadir – that with K2 (as well as an improved version of Illustrator, which has been waiting in the wings and has recently depressed sales of that product), shareholder value will be maximized by the current management team and product portfolio.

While the company is fighting the investor relations fire, it will be distracted and unable to pour those energies into the marketing phase of K2. And a hobbled Adobe is less likely to do damage to XPress.

Quark wins, whether it acquires the company or not. Newspapers, on the other hand, are potential big losers.

– David M. Cole

Inside ...

• Spurt in share repurchases is no big mystery
• Big money flows from newspaper industry foundations
• NAA commits $5 million to creating an advertising clearinghouse
• Circulation managers labor to find and keep delivery staff
• Don't wash your hands of this targeted marketing concept
• Persons

From NEWSINC., Aug. 31, 1998, Copyright © 1998, The Cole Group. All Rights Reserved.