Summary
Cisco's acquisition of Starent for a $2.9B cash is remarkable in several ways. First it is 3 times the price compared to the market cap when Starent went IPO a couple of years ago. It is also about 50 times the 2009 earnings. So, it is a very significant premium even for Cisco standards. So, what does Cisco gets for such a high price?
Analysis
For $2.9B, Cisco gets a very strategic component of their vision, basically routers for mobile networks. All the market indications are that mobile networks will be critical for the future growth of Internet all around the world. With more than 500 Million smartphone and mobile broadband already overtaking fixed broadband, the future of Cisco lies in the mobile world. Without a very strong portfolio of networking products for mobile operators, Cisco's future would be in danger. So, this is Cisco's catching-up with the mobile broadband growth.
In addition to strategic benefits, Starent brings a set of credible mobile customers that Cisco can leverage very effectively. Starent's position with Verizon is one of them. But there are also some talk about AT&T Wireless being in the play. Given the latest bandwidth shortages on AT&T Wireless network (thanks to iPhone!), Starent might be already pitching their solution to AT&T, and Cisco may benefit from that account. there might be several such mobile operator accounts around the world which may help to explain the high price tag for this acquisition.
Finally, with this transaction, Cisco is jumping forward in the mobile networking, and potentially leaving behind some of their traditional competitors such as Juniper. It is too early to tell how Cisco intends to compete with some of the heavy weights in the mobile networking space, such as Ericsson, NSN, Alcatel-Lucent and Huawei. It is possible that Starent will not be enough to equip Cisco and we should expect some new acquisitions down the road.
This author consults with leading institutions through GLG
Analyses are solely the work of the authors and have not been edited or endorsed by GLG.
