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Macromedia falls on outlook, downgrades

Despite topping earnings for its third quarter, Macromedia slumped Wednesday after analysts raised concerns over the company's near-term outlook and merger with Allaire.

Shares in the software and multimedia company dropped over 27 percent, down 12.19 to 31.81, after being slapped with a host of downgrades.

After market close Tuesday, Macromedia beat estimates for its third quarter by 2 cents a share. Earnings jumped 97 percent over the year ago period while revenues saw a 61 percent increase from the same period last year.

The company also announced a $360 million merger with Allaire Corp. (Nasdaq: ALLR), up 0.81 to 8.75, with a view to entering into back-end application development software.

But for analysts, an uncertain outlook for demand and near-term concerns over the Allaire acquisition resulted in a slew of downgrades and lowered estimates for Macromedia. While most agreed that the merger should work in the long run, most analysts decided to adopt a wait-and-see approach.

Macromedia was downgraded to "neutral" from "buy" at U.S. Bancorp Piper Jaffray.

Tucker Anthony Capital Markets analyst Aaron M. Scott downgraded the stock to "buy" from "strong buy" and cut his 12-month price target to $65 from $110.

Scott said that revenues are expected to remain relatively flat sequentially in the March quarter. While noting that the product pipeline at the company remains strong, the analyst raised concerns over the purchase of Allaire.

"While the company expects the deal to be accretive to earnings in fiscal 2002, we are unsure of MACR's ability to smoothly integrate ALLR's products and infrastructure. A year ago, MACR acquired Andromedia, and we have yet to see any tangible server-side benefits resulting from the acquisition," the analyst wrote in a research note.

Banc of America Securities analyst Greg P Vogel downgraded Macromedia to "buy" from "strong buy" and cut his 12-month price target to $58 from $89.

Vogel said that the company's comments appear to show that business has not yet re-accelerated, yielding flat revenue and earnings growth in the fourth quarter.

At Robertson Stephens, analyst Alexander Zorovic, who cut Macromedia to "long term attractive" on demand concerns, was positive on the long term outlook for the merger.

"We believe the success will lie in both companies getting the benefits while sidestepping pitfalls," the analyst noted. Zorovic said that Macromedia needs to offer an open architecture for its products and maintain its focus on core products.