Starent Networks Goes Big With Cisco

By Fedor Smith, ATLANTIC-ACM

The recent announcement of Starent Networks’ acquisition by Cisco Systems Inc. for $2.9 billion means big things for the Massachusetts-based provider of IP-based mobile infrastructure, and the acquisition also offers great opportunity to its new parent company. However, careful management of the integration will directly impact the returns from this acquisition.

Starent Networks has become a leader in facilitating mobile IP services for leading global wireless carriers, which, combined with its exponential revenue growth over the past couple years, makes it a logical acquisition for Cisco. Starent’s revenue climbed from $94 million in 2006, to $254 million in 2008 (a CAGR of 64 percent), is on track this year to break $300 million, and as of December 2008 had a debt/asset ratio of 0.36. Further, the company possesses a customer list that includes leading global carriers like Verizon, Vodafone, SK Telecom and KDDI. Starent Networks is known within the industry for having reliable, scalable, cutting-edge products, and for getting these products to market faster than its larger competitors. The appeal of Starent Networks as an acquisition target is reflected in Cisco’s $2.9 billion purchase price, which will work out to about 50 times Starent’s 2009 net income.

In reality, this is a technology deal, with Starent delivering complementary solutions that create new and expanded opportunities for Cisco's mobile core while providing reverse scope opportunities for Starent and its customers. Other analysts who focus exclusively on the hardware space are better-suited to address the technical details (e.g., compatibility, specific product relationships, etc.), but the long and the short of this situation is that Cisco has lost market share in some key growth areas, while Starent has gone from a small startup to a sizeable competitor in the key growth segment for coming years – wireless data. The premium Cisco paid for Starent Networks is justified as it will make the company a leader in a key niche segment, which also will drive sales the wide range of Cisco products that complement the smaller Starent offering.

This deal also makes sense from a strategic sales and operations standpoint. Cisco’s size and scope will offer massive back-end support resources to Starent and its current customers, as well as Cisco's own product set, along with Cisco’s longstanding reputation for quality and reliability. In other words, this move will provide assurance to carriers who may have been hesitant to choose a smaller provider, but it is vital that being part of a larger entity not bog down Starent’s ability to turn out solutions. Cisco has started off on the right foot with its plan to turn Starent Networks into the Cisco Mobile Internet Technology Group under the leadership of Starent Networks’ President and CEO Ashraf Dahod.

The explosion of mobile data usage and the facilities needed to support that growth represent the greatest near-term opportunity in the telecom industry. As Cisco cited in its announcement, “The Mobile Internet is at an inflection point as IP-enabled Smartphones and other connected mobile devices gain rapid acceptance. Service providers have been actively investing in this market as global mobile data traffic is expected to more than double every year through 2013, according to the Cisco Visual Networking Index.” The acquisition of Starent Networks has positioned Cisco to be a leader in supporting carriers as they address ongoing exponential demand growth.

Disclosure: ATLANTIC-ACM provides research and analysis services to both Cisco and Starent Networks.

Fedor Smith is president of ATLANTIC-ACM, a provider of strategy research, consulting and benchmarking services to telecommunications and information industry companies. An expert in niche- and channel-based marketing and operations management, Smith specializes in customer satisfaction and benchmarking projects for ATLANTIC-ACM, where he oversees proprietary projects as well as the firm's Carrier Report Card series, which serves as the telecommunications industry's principle source of benchmarking tools. In addition, he has authored several studies on telecommunications industry growth and opportunities. Prior to joining ATLANTIC-ACM, he worked at Alloy Media and Marketing in New York developing youth-oriented marketing programs around the evolving technology consumption and adoption habits of high-school and college-age consumers. He holds a degree in history and economics from Hamilton College.