Cisco buying Flip video camera maker for US$590 million

Pure Digital buyout via stock preserves cash for other acquisitions, one analyst says.

Cisco Thursday announced its intent to acquire privately held Pure Digital Technologies, creator of the Flip video camcorder for consumers, for US$590 million in stock.

The deal had been expected.

Pure Digital is a "pioneer" in developing consumer-friendly video with mass-market appeal, Cisco says. The acquisition of Pure Digital is key to Cisco's strategy to expand momentum in the media-enabled home and to capture the consumer market transition to visual networking, the company said in a statement.

"We view Pure Digital as broadly in-line with Cisco's consumer strategy," said UBS analyst Nikos Theodosopoulos in a bulletin on the deal. "Pure Digital will add to Cisco's arsenal of products aimed at driving increased network bandwidth, similar to Cisco's video conferencing products. As more consumers upload video content to the web, it will also drive demand for Cisco's traditional products--switches and routers."

Pure Digital's Flip Video has sold more than 2 million units by being "simple, accessible and fun," Cisco says. The products come equipped with software that allows users to organize and edit videos, and then share them on YouTube, MySpace and other popular sharing Web sites.

Upon the close of the acquisition, Pure Digital will become part of Cisco's Consumer Business Group, which includes Linksys by Cisco home networking, audio and media-storage products. Pure Digital Chairman and CEO Jonathan Kaplan will become general manager of the combined organization, reporting to Ned Hooper, senior vice president of Cisco's corporate development and consumer groups.

In addition to exchanging US$590 million in stock for all Pure Digital shares, Cisco will provide up to US$15 million in retention-based equity incentives for continuing employees. The acquisition is expected to close in the fourth quarter of Cisco's fiscal year 2009.

"We suspect Cisco used all stock to preserve cash for other potential deals," Theodosopoulos states in his report.

Here's what another financial analyst had to say:

"Cisco has been looking to expand its consumer and video presence and Pure Digital fits this strategy, and the growing trend of user generated video is clearly a driver of bandwidth," states Oppenheimer & Co. analyst Ittai Kidron in a report on the acquisition. "That said, we're mixed on this pricey acquisition, particularly in this environment, as it's unclear to us how Cisco differentiates Pure Digital longer term and how it ties into its other consumer orientated businesses."

In his report, Kidron estimates that Pure Digital's 2008 revenue was US$150 million, up from $50 million in 2007. The company holds roughly 24% market share in the camcorder market, and currently five of the 10 top-selling camcorders on Amazon.com are Flip models, according to Kidron.

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