“Cisco is buying Starent. It was just yesterday when I was doing the Closing Bell at 3:00, we were doing a segment on technology company, what kind of deals may be out there. We know they’re sitting on a lot of cash. Cisco, as Faber put it this morning, is a serial acquirer. We expect at lot of deals to come and this is not a small one, almost $3 billion. Starent up on that news.” — CNBC’s Squawk on the Street 10/13/2009
The ink has barely dried on Cisco’s (CSCO) bid to acquire Tandberg for about $3.2 billion in cash, as today, the “serial acquirer” Cisco announced another acquisition. This time it is for the wireless technology firm Starent Networks (STAR) for nearly $3 billion. Cisco has offered $35 per share, which represents a 21% premium to yesterday’s close. The acquisition would give Cisco a better foothold into the mobile network infrastructure business.
Starent makes equipment that helps wireless network carriers process and efficiently route traffic; a service that has become much more necessary with the popularity of data hogging devices such as Apple’s (AAPL) iPhone and Research in Motion’s (RIMM) Blackberry. Starent’s current largest customer is telecom giant Verizon (VZ), accounting for 70% of revenue in the most recent quarter. Cisco expects worldwide data transfer traffic will at least double every year through 2013. The addition of Starent should be accretive to earnings in fiscal 2012 by Cisco’s estimates. Assuming the acquisition closes (planned for first half 2010), Starent would become Cisco’s Mobile Internet Technology Group led by Starent CEO Ashraf Dahod.
Clearly, Cisco is attracted to the growth potential in the mobile Internet space, as they are willing to pay about 40 times fiscal 2010 earnings estimates. The Street seems unconcerned by the premium offered or the valuation as Cisco traded in positive territory all day. Starent is not a company that we cover at Ockham, so we do not have a rating on the stock. In general, it is not difficult to see how this deal would be a nice fit for Cisco; the recent and recession resistant consumer behavior shows that the mobile Internet is not going away. We believe the demand for bandwidth will only increase as WiMax and 4G networks continue to spread across the world.
Cisco is following its traditional playbook of being aggressive when it sees value in the wake of a downturn. The strategy in both the Tandberg and Starent deals could not be clearer; find some of the fastest growing technologies (video conference and mobile Internet) that will necessitate high performance networks and jump right in the middle of them. This strategy should help Cisco become the backbone of the next big thing. For a company that entered the quarter with nearly $34 billion in cash on hand, they may not be finished yet. We continue to believe that Cisco is Fairly Valued, but there is no doubt that growth is a very high priority.