M&A Alert - October 13, 2009
Cisco Agrees to Acquire Starent Networks
Transaction Overview
On October 13, 2009, Cisco agreed to acquire Starent Networks (NASDAQ: STAR) for $2.9b in cash.
Target Description
Starent Networks provides network equipment to wireless network operators who are upgrading from traditional circuit switch technology to packet-based technology. Packet-based technology is particularly well suited for multimedia services such as video, internet access, VoIP, email, mobile TV, photo sharing and gaming. Starent, with 1,000 employees, went public in 2007 following $98mm in funding from a group of venture investors which included Highland Capital Partners (Partner: Sean Dalton), Matrix Partners (Partner: Tim Barrows) and North Bridge Ventures (Partner: Ed Anderson). Starent was founded in 2000.
Buyer Description
Cisco is the dominant supplier of networking equipment and network management for IP-based networks. It offers routers and storage systems that allow delivery of mobile, data, voice, and video applications on fixed and mobile networks via digital set-top boxes, digital media products and wireless systems. It also offers switching systems that provide connectivity to end users via multiple workstations, IP phones, access points, and servers. Starent Networks will be integrated to Cisco’s newly formed Mobile Technology Group. Ned Hooper, Chief Strategy Officer and SVP of Consumer Business, and Pankaj Patel, SVP/GM of Services Provider Business were the executive sponsors of the acquisition. Founded in 1984, Cisco is based in San Jose.
Transaction Parameters
Starent is a profitable company and had $254mm revenue in CY 2008 representing 74% growth from CY 2007. As of June 30, 2009, Starent reported 79% gross margin, 31% EBITDA margin and 23% net profit margin. Cisco will fund the acquisition using cash off its balance sheet.
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| Enterprise Value | $2.4b in cash |
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| Enterprise Value Multiples(1): | |
| LTM Revenue | 8.5x |
| LTM EBITDA | 26.9x |
| LTM Net Income | 37.5x |
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| Premium Paid: |
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| 1 day Prior to Announcement | 20% |
| 30 days Prior to Announcement | 43% |
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Note: Data is sourced from Capital IQ and Company’s Press Releases.
(1) LTM is as of 06/30/2009. LTM Revenue, EBITDA and Net Income were $288mm, $91mm, and $65mm respectively
Strategic Rationale
The acquisition of Starent is all about the convergence of the internet and mobile networks or the creation of the “mobile internet”. Starent brings a set of packet-based technology products which will play a key role in mobile network upgrades over the next several years as mobile network operators move from 3G to 4G network capabilities. Cisco does an excellent job at articulating the underlying drivers and strategic rationale in this blog post. Recent Cisco’s acquisition around 4th generation wireless networks includes Navini Networks (a WiMax infrastructure solutions provider) which Cisco bought for $330mm in 2007. Starent represents Cisco’s 140th M&A transaction and its second major transaction in 2009 after Tandberg, a videoconferencing equipment vendor which Cisco announced two weeks ago for $3b (3.5x revenue) in cash.
Architect Partners’ Observations
This acquisition highlights the growing importance of high bandwidth mobile network, driven by the increasing demand of high-data traffic as smartphones and soon-to-be-introduced netbooks are seeing phenomenal growth in usage. According to Cisco’s Visual Networking Index, as of 2009, 1.6b people are connected to the internet and global mobile data is projected to double every year through 2013, with a 66-fold increase in mobile data traffic between 2008-2013. With Starent, Cisco will enable mobile operators to deliver and monetize multimedia products and services. Starent also represents an important move against the traditional suppliers of wireless network equipment such as Ericsson, Nokia-Siemens and Alcatel-Lucent.