By Shlomi Cohen
Sometimes a company’s share price is seemingly very high because it is on the verge of being taken over by one of the major players in its sector. And sometimes those major players are crazy for video.
That, in many people’s opinion, is what happened last week to Cisco (Nasdaq: CSCO), when it bought privately-held Pure Digital Technologies for $590 million in Cisco shares.
Pure Digital was founded several years ago by Jonathan Kaplan from San Francisco, based on the brilliant idea of developing a small and simple digital video camera the size of a box of cigarettes. The device is called Flip, it retails for about $150, and it is based on 2 gigabytes of flash memory. That is enough to record, transfer to computer, and erase short movies at reasonable quality.
Exactly parallel with the first launch of the device, about two years ago, came the YouTube phenomenon, which propelled sales of the Flip to 2 million devices as of today.
It turns out that there is nothing more simple and easy to do than to pull out a Flip from your pocket, record a short clip, and transfer it to the Internet with a standard USB cable.
But analysts and investors asked why the heck Cisco needed this toy. They claim it is a somewhat strange, to say the least, way to spend $90 million.
Personally, I was quite surprised, because about a year ago, a rich uncle brought together our whole extended family at a Tel Aviv hotel, where he proceeded to give out Flips to each of the dozens of youngsters there. At first, I was happy that there is another flash application on the market which will pay royalties to SanDisk Corporation (Nasdaq:SNDK), but only after several months I realized something else important.
Essentially, in every home, alongside the big professional video camera, there can be a simple Flip, for recording quick and short clips of family and social events.
Sources at Cisco said last week that for the past year, CEO John Chambers has had several of the devices in his home, and that senior executives at Cisco used the Flip to upload professional videos through YouTube, as a part of intra-company communication.
Bank of America analyst Tal Liani was correct when he wrote recently that Cisco’s next acquisition would surprise the market, and will be in the consumer sector, but even he did not believe that Cisco would begin its way into the consumer sector by becoming a video camera producer.
Liani, who rates Cisco a “Buy”, with a target price of $20, related to the acquisition recently. In his estimation, the purchase stems first of all from Cisco’s desire to widen as much as possible the usage of video on the Internet, because Cisco’s bread and butter is the routers and switches for broadband infrastructure. With the Flip, Cisco has done that in the consumer arena, after achieving the same thing in the enterprise sector through the major acquisitions of Scientific Atlanta and WebEx in recent years, and with the launch of its TelePresence platform for video conference calls.
Additionally, Liani believes that with the Flip, Cisco has extended its footprint in the house, where it already had a presence with its home network division Linksys. Liani sees the acquisition as the first, small step in a long journey of 5-10 years, at the end of which Cisco wants to be, like Apple (a consumer brand of several gadgets, and it is interesting to see what its next step in this direction will be.
In contrast to Liani, Credit Suisse analysts give Cisco a “Neutral” rating, and say they don’t have any idea what Cisco is seeking with the acquisition, just as they had no idea what Cisco intended in January when it announced it was entering the consumer market. It seems to them like a wasteful way to achieve growth at any price, even in a sector which is not synergetic with its products. They believe that Cisco apparently has concluded that sales of routers and switches will not return, even after the current crisis, to the high growth rates of the past.
Courtesy of: seekingalpha.com