Tuesday, October 13, 2009

Cisco to acquire Starent. BAD use of cash (CSCO, STAR, TAA.OL)

If that title (above) looks familiar, it's nearly the same one I used when Cisco bought Tandberg eariler this month.

As I wrote then, Tandberg was a good use of cash. Cisco paid 3.77 times sales and 21times trailing earnings for the firm, about what Cisco trades for. And Tandberg, despite the similar valuation, has gross margins above Cisco's own.

Starent is a whole other story. First the good news. They have company gross margin of 77% -->> huge, and for the first six months of this year they're actually 79%.

Revenue growth is explosive, growing 75% in 2008 to $254 million. But whoops, so far in 2009, revenue growth is about 28%. It's a tough year for everyone I concede, but revenue is slowing and that should figure into the purchase price.

It didn't. Cisco spent lavishly on this deal, paying $3billion, or about 9 times this year's expected revenue. As I said, Starent's gross margin near 80% is awesome, but this deal is rich. 2009 Free Cash Flow could (generously) come in at $58million -->> so this deal is a 1.9% FCFY (Free Cash Flow Yield). Cheers to Starent shareholders , take the money and RUN.

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