Cisco to Buy Starent for $2.9B

Only days after its CEO, John Chambers, suggested he was preparing further acquisitions, Cisco Systems Inc. (Nasdaq: CSCO) has announced it's buying mobile packet core specialist Starent Networks Corp. (Nasdaq: STAR) for an eye-watering $2.9 billion, or $35 per share. (See ITU: Cisco's Chambers Hints at More M&A.)

Not surprisingly, Starent's share price is up $5.25, more than 18 percent, to $34.28, having closed Monday at $29.03. Starent's stock closed 2008 at $11.93.

Cisco, which expects to close the deal during the first half of 2010, expects the acquisition to dilute its non-GAAP earnings in fiscal 2010 (ending July 2011) and fiscal 2011, before adding to its non-GAAP earnings in the following years. Once the deal is completed, Starent, which generated full year 2008 revenues and net income of $254.1 million and $60.5 million, respectively, will form Cisco's Mobile Internet Technology Group. (See Starent Reports Q4.)

Starent CEO Ashraf Dahod will head up that group. He was interviewed by LRTV earlier this year:

The move, which comes only days after Cisco announced the $3 billion acquisition of conferencing specialist Tandberg ASA (OSE: TAA), propels Cisco into the heart of the 3G and LTE market, where Starent has been achieving increasing success. (See Cisco Bets $3B on Tandberg .)

And it's a combination that should work, according to Heavy Reading senior analyst Gabriel Brown, who is just completing a new report on the Evolved Packet Core (EPC) market.

"Cisco has the technical consulting and integration expertise for next-generation, all-IP networks, while Starent has a good platform," says Brown. "Starent has all the product momentum in the mobile packet core market. Its appeal is that it has one box for all the different applications. Starent already dominates the CDMA market and is steadily building market share in the 3GPP sector" (GSM and WCDMA, that is), as well as landing early LTE accounts, adds the analyst. (See Starent Bolsters Its ST40, Starent at Core of Cox's 3G Push, Starent Intros Convergence Platform, and MWC 2009: Starent Dines on LTE.)

"This fills a gap for Cisco and will allow Starent to take its technology global. One of the problems Starent has had is market reach. It hasn't had the feet on the street to expand as much as it might, and so has had to concentrate on high-end, Tier 1 accounts. Now Cisco can take it global," says Brown.

The news is likely to cause a stir at Starent's main mobile packet core rivals, Alcatel-Lucent (NYSE: ALU), Ericsson AB (Nasdaq: ERIC), Huawei Technologies Co. Ltd. , Nokia Siemens Networks , WiChorus Inc. , and ZTE Corp. (Shenzhen: 000063; Hong Kong: 0763). It might also leave Motorola Inc. (NYSE: MOT) wondering what will happen to its Starent partnership. (See ZTE Pumps Its LTE Credentials, Core Network Challenges LTE Vendors, AlcaLu Mines IP Smarts for LTE Core, MWC 2009: Verizon Picks LTE Vendors, and Motorola Enlists Starent for 4G Push.)

The news comes just as Starent, which saw its first-half 2009 revenues increase by 29 percent year-on-year to $151.5 million, has been linked to some acquisition talks of its own. (See Analyst Says Camiant Turned Down Juniper & Starent, Is Starent Ready for M&A Action?, and Starent Reports Q2.)

— Ray Le Maistre, International News Editor, Light Reading