A Friendly Merger -- Aldus And Adobe -- Aldus Name, Staff Reductions Are In Question

Over a plate of eggs at 7 a.m. one day last November at Meany Tower Hotel, Aldus President Paul Brainerd made a brief remark to an old business friend, Adobe Systems Chairman John Warnock.

The two, who essentially created the $2 billion desktop publishing industry, were meeting to talk about ways their software products could work together.

Brainerd, 45, raised the possibility that Aldus and Adobe might be better off as one company. A few of his executives had looked into the potential merger and liked what they saw.

Five hectic months later, the idea floated by Brainerd became reality. The two companies would become one.

Brainerd and Warnock, together again last month for a national telephone news conference, unveiled the $525 million deal that would give the Seattle company a needed injection of capital and possibly a handsome profit to shareholders.

On the down side, the merger probably will mean the elimination of jobs at both companies and is almost certain to result in a diminished corporate presence in Seattle. Whether the venerable Aldus name will be retired from software products, however, has not been decided.

Little of that seemed imminent at that November breakfast in the University District. Warnock, 53, who is an old pro in the software industry, knew suggestions like Brainerd's rarely mean much.

But he didn't dismiss it. Sure, he said, a merger sounded interesting. He'd have someone look into it.

It wasn't the first time Brainerd had raised the merger issue.

A few years ago, when Aldus was going through a tough period - Warnock can't remember precisely when - Brainerd had made the same suggestion.

"These kinds of things aren't infrequent," said Warnock last week in an interview.

"You are normally very polite in these situations. . . . Usually, you go off and look at the economics of the situation to see if the thing will work. Most times, they just go away."

Shortly after the November meeting, Warnock swore a tiny group of senior Adobe executives to secrecy. Then he charged them with scouring Aldus' annual reports and other public documents and coming up with a "back-of-the-envelope" calculation on whether the merger would be in Adobe's best interests.

"This time, it worked," he said, because Aldus had worked through many of its earlier problems and is a stronger company today.

Negotiations continued right up to the merger announcement. "Up to five minutes before the announcement was made, significant issues remained," said Brainerd.

Once terms were finalized, a news conference was called immediately to avoid the news leaks that could affect trading in the companies' stock. Even with that precaution, the Pacific Stock Exchange said minutes after the announcement that it had opened an investigation into unusually heavy trading in stock options of one of the companies in the hour before the news conference.

Dale Carlson, a vice president of the San Francisco-based exchange, said Friday that results of the investigation had been turned over to the Securities and Exchange Commission. Carlson wouldn't say what the PSE found or identify which company's stock was being investigated.

Under the terms of the deal, Adobe will swap 1.15 shares of its own stock for each Aldus share. The value of those shares won't be set until the day, most likely in late June or early July, when shareholders of both companies will be asked to approve the deal.

On March 15, the day the merger was announced, Warnock explained the main reason for the deal: "We believe our two companies, each with a rich history of inventing different aspects of the electronic publishing revolution, are simply much stronger together - both technologically and financially - than they would be by remaining separate."

Most observers agreed.

"It's a good marriage," said Scott McAdams, an analyst with Ragen MacKenzie in Seattle.

Catlin Wolfard, an analyst with Portland's Black & Co., said "the deal is basically smart. There's no debt here. The merged company will have $310 million in cash, $520 million in annual revenues and zero debt."

Analysts said the deal makes sense because both companies are in the same part of the software industry and are about the same size. Aldus, founded in 1984, had 1993 revenues of $207 million. Twelve-year-old Adobe had sales last year of $313 million. Aldus has 1,100 employees; Adobe has 1,000.

Corporate cultures and management styles, however, differ. Aldus is driven by creating and selling software "with established design, development and delivery methodologies," writes Edgar Bierdeman, an analyst with San Francisco's L.H. Alton & Co.

Adobe, on the other hand, is more market-driven, causing "a sometimes chaotic approach to seizing market opportunities and exploiting them."

Some of that may change when the two companies combine. But Aldus and Adobe will maintain separate offices in Seattle and Mountain View, Calif., which may limit some culture clash.

Both companies have said the consolidation will result in layoffs. Neither Brainerd nor Warnock would estimate the size of the cutbacks, but Warnock said they will likely hit both companies equally.

Analysts said several areas are vulnerable, particularly administration, finance, customer service and human resources.

Adobe's marketing is considered more efficient, making Aldus' marketing department a candidate for staff reductions. Duplication in overseas sales offices, notably in Europe and Japan, is likely to result in cuts there.

On the other hand, Seattle's high-tech strength means it has a pool of workers that would be appealing to the combined company, said Warnock.

Adobe President Charles Geschke will replace Brainerd, who announced in August he would retire from active management at Aldus.

Brainerd, who signed an "irrevocable proxy" to sell his 3 million Aldus shares to Adobe, will join Adobe's board, a less-demanding job that will allow him to put his time into his newest venture - creating an environmental foundation with some of his wealth.

That fortune will, of course, be expanded handily by the merger. Brainerd's Aldus shares will turn into 3.45 million Adobe shares when the deal closes. If Adobe's stock price reaches the $32.50-a-share level it was the day the deal was announced, Brainerd's Aldus stake will be worth $112 million, $33 million more than the day before.

The shares of both companies, however, have suffered with the broader market correction. Adobe closed Friday at $24.31 a share; Aldus was at $26.50.

With the merger, Aldus as a public company will disappear. Its history has been shaky. In 1992, industrywide software price-cutting and Aldus' slow introduction of an upgrade for its flagship PageMaker program caused a 71 percent decline in its earnings, to $6.8 million.

Management was shaken up and about 100 employees, or 11 percent of Aldus' work force, were laid off. In the summer of 1992, Aldus' stock hit an all-time low of $10.25, almost half of its value when it went public in 1987.

The cost-cutting and June 1993 launch of the PageMaker upgrade, along with nine other desktop-publishing applications last year, began to put the company back on track. Revenues leapt 19 percent, to $206.7 million in 1993. Earnings were $9.5 million, still well behind 1992's $23.8 million peak but a 40 percent increase over 1992's troubled results.

Adobe, too, has suffered from price cutting. Revenues from its core business, licensing of its PostScript language, have slowed and the company is hungry for new products.

Adobe also had a bad year in 1992, when income slumped 16 percent to $43 million, then recovered to $57 million last year. After two years of 35 percent-plus revenue growth, sales rose only 16 percent in 1992. Last year, revenues were up 18 percent to $313 million.

The two companies' products are generally considered highly complementary - particularly Aldus' PageMaker and Adobe's Acrobat, which is a group of software products that allow fully formatted documents created on different software programs to be transferred between most computers.

Some analysts have suggested that overlap in the functions performed by a few products may lead to elimination of some of them.

Bierdeman said Adobe's Illustrator design and illustration software may conflict with Aldus' Freehand computer drawing program.

Warnock, however, said the two companies may take more of a smorgasbord approach, and both Illustrator and Freehand are likely to survive. Knocking products out of the mix "is not our intention. Our intention is to be like Procter & Gamble - to offer a variety of different soaps under different labels."

The merger is expected to help both companies move into the emerging market of manipulating video images with digital technology.

When the merger was announced, Warnock said the combined company will "pioneer the process and provide the tools required to help our customers move from today's paper-based information infrastructure to tomorrow's digital world."

Aldus last year acquired Rhode Island-based CoSA, a developer of digital software tools for creating and manipulating video images, for $3.2 million.

That acquisition, said analyst Wolfard, helped Aldus "move way out front at the high end. They are looking at a software solution on the PC or Mac that would sell for $20,000," which would offer the same capabilities as higher-priced programs. Other analysts, however, said CoSA's digital imaging software is unproven, leaving the company's future in this area uncertain.

Warnock said Adobe's digital technology, in its Acrobat software, was a major reason why Aldus opted to merge.

There are many other details remaining to be hammered out.

Warnock said that when the merger was announced, "I was tremendously relieved. . . . You can talk about something you have kept bottled up for three months.

"Then the realization comes that, now, the work begins."