By Douglas J. Barnett

dbarnett@atlantic-acm.com (dbarnett@atlantic-acm.com)

Background:

On October 13, Cisco Systems Inc. and Starent Networks, Corp. announced a definitive agreement wherein Cisco would acquire Starent Networks in a cash-for-stock deal valued at approximately $2.9 billion dollars. The successful completion of the acquisition underscores Cisco’s entry strategy into markets that it believes promise the most growth throughout the recession (and beyond).

Analysis:

• Terms of the Deal: The deal is estimated at a total purchase price of $2.9 billion and is expected to close during the first half of calendar year 2010.  Under the terms of the deal, Cisco will pay $35 per share in cash in exchange for each share of Starent Networks and assume outstanding equity awards. The per-share purchase price represents a 21-percent premium over Starent’s closing stock price of $29.03 on Monday October 12 (day prior to announcement), on the NASDAQ Stock Market. Until the close of the deal, Cisco and Starent Networks will continue to operate as separate companies.  Assuming the deal closes, Starent Networks will become Cisco's new Mobile Internet Technology Group led by Starent Networks’ President and Chief Executive Office Ashraf Dahod, within Cisco’s Service Provider Business.
  
• Starent Networks:  A Niche Growth Machine: Founded in 2000, Starent Networks completed its initial public offering in 2007. From 2007 to 2008, Starent Networks reported a year-over-year increase of 74 percent in total revenue, growing from $145.8 million to $254.1 million. Starent Networks continued to grow revenues through the recession, increasing net revenue 30 percent from 1Q2008 to 1Q2009. Although the company’s rapidly expanding operations have positively impacted its top line, the company remains a niche player, specializing in mobile infrastructure solutions.
  
• Response to expected growth in mobile data traffic: In January 2009, Cisco released its latest Virtual Networking Index: Global Mobile Data Traffic Forecast. According to the report, global mobile data traffic will double every year from 2008 through 2013, increasing at a Compound Annual Growth Rate (CAGR) of 131 percent from 2008 to 2013. Furthermore, mobile video traffic is expected to account for nearly 64 percent of total mobile data traffic by 2013, the fastest growing application category measured within Cisco’s Virtual Networking Index Forecast. To accommodate the kind of traffic increases predicted by Cisco, mobile service providers will have to purchase and install mobile infrastructure technologies and solutions like those sold by Starent Networks. To provide some context, ATLANTIC-ACM’s U.S. Telecom Wired and Wireless Sizing and Share: 2009-2014 forecasts the U.S. Postpaid Wireless Data market to reach nearly  $60 billion by 2014, growing at a CAGR of over 11 percent from 2008 to 2014.

The Bottom Line:

Cisco’s acquisition of Starent Networks signals its entry into a business it believes is a latent growth opportunity.  In the recent past, Cisco has been losing revenue to rivals Alcatel-Lucent and Huawei Technologies due to its inability to offer wireless infrastructure to complement its traditional carrier networking equipment.  In response to the expected acquisition, Ned Hooper, Cisco’s Chief  Strategy Officer stated: “The acquisition should increase Cisco’s ability to help carriers manage the data moving across wireless networks.” ATLANTIC-ACM expects that the successful integration of Starent Networks’ operations will prove to be a critical step in Cisco’s attempt to offer a complete core routing set.