With just one month to go before the first Windows Phone 7-equipped smartphones hit the market, Microsoft (NASDAQ: MSFT) is searching for an answer to the No. 1 question about the mobile market: How do we beat Apple (NASDAQ: AAPL)? Phones powered by Google’s (NASDAQ: GOOG) Android operating system are rising against the iPhone juggernaut, but Apple’s device is still the machine to beat. Here’s one answer: acquire Adobe (NASDAQ: ADBE). Bringing the company behind many of the world’s most used pieces of design software, particularly the ubiquitous but Apple-scorned Flash multimedia platform, would give Microsoft a new revenue stream and crucial support as it makes its bid to win the smartphone market this fall. According to an article in The New York Times, that acquisition may very well happen.
CEO Steven A. Ballmer and a number of other Microsoft staff members met at Adobe’s offices earlier this week. The Times report claims Ballmer was there specifically to meet with Adobe CEO Shantanu Narayen to discuss how the two companies could partner to break Apple’s grip on the mobile-phone industry. One of the strategies discussed was a Microsoft acquisition of Adobe Systems, according to unnamed consultants and employees present for and aware of the meetings between the two companies. The new partnership would help strengthen Microsoft’s Windows Phone 7 platform while helping to bolster Adobe’s presence on mobile platforms, including Apple’s iPhone. Another Times source claims that this is just the most recent series of acquisition talks between the two companies. Microsoft expressed interest in Adobe years ago, well before Google became the software giant it is today and before Apple brought smartphone technology into the mainstream, but it ceased talks fearing antitrust scrutiny from the Justice Department.
Apple and CEO Steve Jobs in particular have infamously blocked Adobe’s Flash on Apple’s mobile platforms under the auspices of encouraging adoption of the HTML 5 Web standard, though Apple has been motivated by pushing its own platforms, like Quicktime, over Adobe’s. Historically, Microsoft and Adobe have also been rivals with competition picking up between the two after Microsoft launched the Silverlight multimedia platform. While Silverlight has a number of high-profile supporters — Netflix (NASDAQ: NFLX) uses Silverlight for its Web-browser streaming video service — Adobe’s Flash is more commonly used for video and game creation on the Internet.
Microsoft is trading at around $24.50 today, down 22% from a 52-week high of $31.58 in April. Adobe, meanwhile, has been experiencing major ups and downs over the last quarter. After the market crash in 2008, Adobe made a steady recovery over the course of 2009, but its shares have fluctuated between $25 and $33 in the last five months. Adobe jumped 12% following news of the possible acquisition yesterday, showing investor confidence in the union. While neither company needs the other to survive or thrive, the acquisition will only help them both if they hope to take on Apple. Investors should keep an ear to the ground and buy Microsoft while the price is low to take advantage of what may be a strong launch for Windows Phone 7.
As of this writing, Anthony Agnello did not own a position in any of the stocks named here.
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