In Wake of Starent Acquisition, Cisco Smartphone Possible

Although most of its cash is overseas, Cisco tapped nearly half its available US cash ($2.9 billion) for its announced acquisition of Starent Networks today.

The Starent deal follows closely on the heels on Cisco’s $3-billion acquisition of videoconferencing-systems vendor Tandberg. That deal was done with Cisco’s mountain of foreign cash. Before the Starent deal was announced, Cisco had approximately $29 billion in foreign cash and about $6 billion to spend within the USA.

Video is the common denominator linking the two deals. Tandberg provides room- and desktop-based videoconferencing systems, including telepresence offerings that complement those Cisco already had. Starent provides network infrastructure that enables wireless operators to scale and optimize their networks for delivery of mobile-broadband services, which increasingly feature video communications from smartphones such as Apple’s iPhone.

Starent’s solution portfolio spans practically every flavor of 3G and 4G networks. The company recently announced that it had reached its 100th carrier deployment. Starent’s top customers include Verizon Wireless, Vodafone, Sprint, and China Telecom.

In the first six months of this year, Starent had revenue of approximately $129 million, up 27.6 percent from the same period a year ago. Net income was about $28 million, up 19.3 percent from year-ago results. In 2008, Starent had revenue of $254.1 million, up 74 percent from the year before. It has about 1,000 employees worldwide, approximately 290 of which are located in Massachusetts, where the company is based.

Cisco expects the acquisition to dilute its earnings in its fiscal years 2010 and 2011 and to be accretive in fiscal year 2012. The transaction has been approved by both boards and now awaits regulatory clearance.

According to Dow Jones Newswires, Cisco is paying a 24 percent premium on Starent’s stock price at close of trading Monday. The New York Times has put the price premium closer to 20 percent.

Cisco believes the market for mobile data will double every year through 2013. It forecasts that about 60 percent of the data traveling across mobile networks in 2013 will be video traffic.

With the acquisitions of Tandberg and Starent, Cisco is betting heavily on video. A company that generally shies away from big-money acquisitions, Cisco now has shelled out close to $6 billion to buy two companies in the first half of October. It will take some work to pull off the Tandberg and Starent integrations simultaneously – particularly considering neither company is in Cisco’s Bay Area backyard.

Given the size of the two acquisitions, and Cisco’s single-minded strategic focus on video communication, I would not be surprised to see Cisco develop its own video-centric smartphones, likely based on the Flip mobile video cameras acquired from Pure Digital.

On March 31, as reported by BusinessWeek, Cisco was awarded a patent for managing time delays in relaying video wirelessly to consumer-electronics devices. That same day, it received a patent for a network-connected phone capable of streaming video. Cisco has filed other patents that cite a PDA-type device that would benefit from those innovations – and could definitely benefit from the products and technologies Starent offers.

Analysts at RBC Capital and UBS wrote earlier this year that a Cisco foray into smartphones shouldn’t be discounted. Those analysts noted that a video-centric smartphone would complement Cisco’s mainstay networking business while taking the company into substantial growth markets.

Many observers might have difficulty envisioning Cisco as a smartphone vendor. But this isn’t your grandfather’s Cisco. It’s doing a lot of things – servers, consumer electronics, a social-entertainment platform for music and entertainment companies – that would have been considered improbable a few years ago.

A Cisco smartphone? It could happen.

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