Contact: Brenon Daly
When we wrote recently that Cisco Systems was an unpredictable acquirer, we only covered half of it. Who would have thought (prior to rumors and subsequent official word last Thursday) that Cisco really wanted to buy its way into the consumer electronics market? Much less that the company wanted to enter that space so badly that it would pay what looks a lot more like a 2007 valuation than a 2009 valuation?
We’re referring, of course, to the networking giant’s acquisition last week of Flip camcorder maker Pure Digital Technologies for $590m. As for the valuation, we understand that Pure Digital wrapped up last year with sales of $150m, meaning Cisco paid about four times trailing 12-month sales for the company. Of course, Pure Digital was growing quickly, but we would still note that its valuation is about twice as rich as Cisco’s current valuation. (There were no bankers on either side of deal, we’ve been told.)
The concern about Cisco’s valuation is more than an academic issue for Pure Digital. After all, it took payment in Cisco shares, rather than cash. And that’s the other part of Cisco’s unpredictability. According to our records, the Pure Digital purchase was the first time Cisco has used its equity to acquire a company in more than four years. (The last time Cisco did a paper deal was its $450m pickup of wireless LAN switch vendor Airespace in January 2005.)
Since then, Cisco has inked some 42 transactions with a disclosed deal value of $13.4bn. And of course, the company still has its well-reported $29bn in cash on hand. That level won’t change due to Pure Digital. We can only speculate why Pure Digital’s backers chose to take Cisco stock rather than cash in this economic environment. But we would note that this isn’t the first time that one of Pure Digital’s backers has taken a slug of Cisco equity. Way back in 1987, Sequoia Capital’s founder Don Valentine put money into Cisco.