A Google (GOOG) Takeover Of Adobe (ADBE)?

GigaOm has suggested that Google (GOOG) may look at buying online tools company Adobe (ADBE). While the big search company would get the large Acrobat and Photoshop, the key to a buy-out would be the access to the Adobe video creation tools. As GigaOm writes “this is the next frontier for Internet advertising revenues, and without a strong presence, it could get away from them (Google).”

Adobe’s Flash player, which runs video, is probably the most widely distributed multimedia player in the world with over 700 million downloads.

Beyond an deal being a good strategic move, an acquisition makes financial sense. Adobes’s shares trade at about $40, which is where they were in April 2006. Adobe has a $24 billion market cap, about eight times annual sales. Google trades at about 12x.

Adobe has about $2.3 billion in cash. In the quarter ending June 1, revenue was $746 million, up from $635 million in the same quarter a year ago. Operating income was $180 million up from $148 million. The 24% operating margin makes the company an attractive target.

According to the Adobe proxy, 20% of the company’s shares are in the hands of three institutions: PRIMECAP, Prudential Financial, and Wellington. Getting their agreements would make a deal relatively likely.

Adobe’s stock seem stuck. That would seem to make it a target.

Douglas A. McIntyre