At $590M, Did Cisco Pay Too Much for Flip?

Stacey and Chris today have been following Cisco Systems’ acquisition of Flip Pure Digital, a maker of affordable camcorders. At $590 million, I wonder if the company paid too much — not that Pure’s management and venture backers are complaining about the price just yet. The San Francisco-based company has raised $68 million over its 7-year history.

I bring that up because Flip Pure Digital has sold roughly 2 million units since May 2007 and has a 17 percent share of the camcorder business, according to NPD. According to Lazard Capital Markets research group, Pure Digital was on $200-million-per-year revenue run rate — that assumes a unit run rate of a million a year. As a comparison, Cisco paid $500 million for Linksys, which brought in a lot of sales, if not typical Cisco margins. Flip is, again, a low-margin business. Unless the company has a super-secret array of new products or is expecting to grow at whiplash-inducing speeds, paying nearly three times revenues for what is, at the end of the day, a consumer electronics business is a very expensive decision. Cisco is clearly buying the notion of future growth and hence paying a super rich valuation. As Ned Hooper, senior V-P of corporate development and consumer group for Cisco, explained in an interview with us earlier today:

“Historically content is locked to a device, and is not open to move around,” Hooper said. This deal helps change that paradigm for video, in the same way Cisco is trying to do with music in its latest Linksys music router, announced earlier this year. To help make moving content around the home and to the web easier, Cisco purchased Pure Networks last year for its software that helps network devices easily and is pushing the HNAP home networking protocol. Hooper said Cisco would integrate HNAP into the Flip camera and would add features to make it easy to operate the Flip on a network based on Cisco gear.

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