Adobe Systems Inc. (ADBE), maker of Acrobat document-sharing software, on Monday said it agreed to buy digital animation and design software company Macromedia Inc. (MACR) for about $3.4 billion in stock.

Acquiring Macromedia, known for its Flash animation software and Adobe's biggest competitor in the design market, helps tighten Adobe's grip over how publishers, advertisers and ordinary Web users create and distribute electronic documents.

The deal positions Adobe to meet rising demand for audio and video images on mobile phones as well as computers. It also increases competition with Microsoft Corp. (MSFT), which is expected to include software to rival Acrobat in its next version of Windows.

But shares of Adobe fell more than 10 percent on concerns that product overlap and selective antitrust issues with Macromedia could cannibalize the combined company's revenue, analysts said. Macromedia stock gained more than 9 percent, reflecting the share-price premium Adobe will pay.

SG Cowen analyst Drew Brosseau said uncertainty surrounding the deal was weighing on Adobe's status as a safe haven for investors in the fast-growing software-design niche.

"There are questions about what kind of product overlaps exist between the two companies," Brosseau said in a phone interview. "For folks who have been hiding in the stock, the uncertainty created by the acquisition has cost the stock its premium," he said. Brosseau has been neutral on the stock.

Macromedia's core software design suite, Studio MX (search), competes with Adobe's Creative Suite, which combines Acrobat, Photoshop and other Adobe tools.

Under the terms of the deal, Macromedia shareholders will receive 0.69 share of Adobe, worth $41.86 at Adobe's closing price of $60.66 on Friday on Nasdaq, for each Macromedia share. That is a 25 percent premium to Macromedia's closing price of $33.45 on Friday, also on Nasdaq.

The deal is the latest consolidation move in the software sector following Symantec's (SYMC) acquisition of Veritas and Oracle's (ORCL) purchase of PeopleSoft.

The deal, set to close in the autumn, would likely yield cost savings, said Adobe Chief Executive Bruce Chizen, without giving further details.

"This is all about growth," Chizen said in a conference call with investors. He said he expects the combined companies to grow faster than they would as stand-alone players.

Adobe said it was unable to estimate the future impact on profits under generally accepted accounting principles (GAAP) due to uncertainty over likely restructuring costs. Adobe said the earnings impact of the deal in the first 12 months, on a non-GAAP basis, would be break-even or slightly positive.

Adobe also announced a $1 billion stock buyback program to start after the Macromedia deal has been completed.

Adobe said second-quarter earnings and revenue would be toward the high end of its prior outlook due to strong demand for Acrobat -- more or less in line with analysts' estimates.

In March, the company said it expected earnings per share between 51 cents and 55 cents and revenue between $475 million and $495 million.

Macromedia said revenue for its fiscal quarter ended in March can top its prior forecasts and Wall Street's consensus.

The combination of Adobe and Macromedia puts the company in competition with Microsoft, which has sought unsuccessfully since the 1980s to extend its reach into the digital-design market and is expected to develop a rival to Acrobat in the next version of Windows.

Chizen downplayed the challenge from Microsoft. "They will always be a potential threat and a potential competitor," he told CNBC television. "The reality is they have been trying to encroach on what we do well for over 20 years now," he said.

Adobe stock fell $6.19 to $54.47. Macromedia gained $3.12 to $36.57.