Cisco Pays $2.9 Billion Cash for Mobile Infrastructure Supplier

Vendor expects global mobile data traffic to double annually through 2013

October 14, 2009

D.H. Kass

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Cisco Systems Inc. is betting on the sustained growth of the mobile Internet, paying $2.9 billion in cash for Starent Networks Corp., a publicly-traded maker of equipment used by carriers to manage the movement of large amounts of data across wireless networks.

Starent’s hardware and software products help data--including video, multimedia and Internet services--traverse wireless networks to cell phones, IP-enabled smart phones and mobile broadband-equipped computers. The company’s high profile customers include Verizon Wireless, Vodafone, AT&T and China Telecom.

Cisco paid $35 per share for Starent’s stock, amounting to a 20 percent premium over the price of the company’s issues at the close of trading on Monday.

The purchase, which has been approved by the boards of both companies, is expected to close in the first half of next year. Until then the two companies will operate separately.

When the deal is finalized, Starent will function as Cisco’s new Mobile Internet Technology Group within the vendor’s service provider business. The unit will be headed by Ashraf Dahod, Starent president and chief executive.

Pankaj Patel, senior vice president of Cisco’s service provider business, said that the companies’ matching technology will “accelerate the transition to the Mobile Internet where the network is the platform for service providers to launch, deliver and monetize the next generation of mobile multimedia applications and services.”

Cisco officials said that the transaction comes at an “inflection point,” suggesting that the mobile Internet--fueled by rapid acceptance of IP-enabled smart phones and other associated devices--is poised, according to the vendor’s internal figuring, to post through 2013 an annual doubling of the volume of worldwide mobile data and a fivefold increase in the amount of global IP traffic.

Ned Hooper, Cisco chief strategy officer, in a statement to investors, said that the “growth of smart mobile devices and netbooks have fundamentally changed consumer behavior with regards to how they use the Internet. This behavior presents major opportunities as well as challenges for service providers.”

Hooper said that “Cisco views mobile infrastructure as a key and growing technological asset as service providers expand their current generation 3G networks while at the same time look to lay the foundation for the next generation 4G standards.”

Starent payoff in the future

Cisco said that it does not expect to make money on the Starent transaction for at least the next two years, calculating that its wager on users demanding access to huge volumes of data transferred over wireless networks will pay off down the road as the mobile Internet matures.

If Starent’s recent financial performance is any indication, Cisco’s play may be more prescient than merely forward-looking. Despite the prolonged slowdown in technology sales, Starent’s revenue for the first six months of this year jumped 29 percent to $151.5 million and income rose nearly 20 percent to $28 million when compared to the same period last year. Its stock price has more than doubled since the beginning of the year.

The company employs about 300 people at corporate headquarters and other locations in the U.S. and another 700 at sites in India, China, the United Kingdom, Japan and Korea.

Cisco’s purchase of Starent comes two weeks after it spent $3 billion in cash to acquire Tandberg, a Norwegian provider of midrange teleconferencing systems.

TAGS: wireless,mobile,Cisco,carriers,Starent

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