Cisco Systems makes another acquisition

10/14/2009 10:30 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Today's buyStarent Networks (STAR). Price $2.9 billion in cash.

What does Starent do? It makes gear that lets wireless carriers deliver multimedia broadband to 3G and 4G smartphones. In this case multimedia means video.

That's the big prize since Cisco Systems (CSCO) estimates that by 2013 about 64% of the Internet's traffic will be video. After the acquisition Cisco will have a complete product line up for wireless operators, according to Wall Street analysts.

Verizon, the biggest U.S. wireless operator,  is Starent's biggest customer.

The deal comes at a hefty price--but it appears worth it.

Cisco is paying about 10 times Starent's sales and about 40 times estimated 2010 earnings. But Starent has grown revenue at a 65% compounded annual rate over the last four years. And those revenues come with an 81% gross margin.

Not surprisingly given the rich multiples Cisco is paying the deal won't be accretive to Cisco's earnings until the second year after it closes, the company said.

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