Cisco to pay $2.9b for Starent Networks

“Obviously, they’ve been a great success story here in the Boston area,’’ said Ned Hooper, Cisco’s chief strategy officer, adding that Starent is “a global leader’’ in helping to meet the new demand for wireless data.

Cisco will pay $35 per share for the company, which will become its newly formed mobile Internet technology group under Starent chief executive Ashraf M. Dahod. Cisco, which is based in San Jose, Calif., said it had also signed contracts to retain the rest of Starent’s top managers, and had no plans to reduce the company’s worldwide workforce of about 1,000. The group will remain in Tewksbury.

The acquisition means a big payday for Starent’s directors and top managers. As of Jan. 15, company director Edward T. Anderson held 10.6 million company shares; at $35 per share, his holdings would be worth $371 million. Director Timothy A. Barrows holds stock worth $253 million under the Cisco deal, while Dahod’s shares would have a value of $241.5 million. Four investment firms - Matrix Partners, North Bridge Venture Partners, Highland Capital Partners, and Fidelity Investments - hold over 31 million shares between them, and will receive a combined total of $1.1 billion.

The deal underscores the dramatic worldwide surge in demand for cellular data services, which bring the Internet and e-mail to laptop computers and smartphones like Apple Inc.’s iPhone and Research In Motion Ltd.’s BlackBerry. Cellphone usage overall has declined due to the recession, but sales of data-hungry smartphones jumped 27 percent in the in the second quarter of 2009, according to data from the research company Gartner Inc. Gartner found that overall wireless phone sales fell 6 percent in the same period.

Phil Marshall, a research fellow at the think tank Yankee Group in Boston, said that the world’s cellular networks will have to double their data-carrying capacity every year for the next six years to keep up with demand. “This is a very strategic market that Cisco needs to establish a stronger play in,’’ Marshall said.

Starent, founded in 2000, makes equipment that directs the digital traffic, collecting streams of information from mobile devices and sending it through the network as cheaply as possible. Managing data over a wireless network is more difficult than handling voices. Some kinds of data, like video or music, require very fast, precise routing to avoid garbling the information. Other data traffic, like Web pages and e-mails, are more forgiving and can be handled a little more slowly. In addition, as users of mobile devices move around, the network must be able to follow them, routing data from one cell tower to another without losing any information.

Starent focused on solving these problems well before demand for cellular data began to surge. Today, the company’s products are highly competitive against offerings from much larger rivals like Nokia Siemens Technologies. Starent made its first profit in 2005. In 2008, it posted revenue of $254 million, up 74 percent from the year before, while profits shot up 428 percent to $40.5 million.

“Today’s announcement is not a termination of our work, but another milestone in our journey,’’ said Starent founder Dahod. “Rarely do you see two organizations so well aligned in their culture, business, and values.’’

Thierry Maupile, Starent’s vice president of marketing and business development, said his company had been in discussions with a number of networking companies before deciding that an acquisition by Cisco made the most sense.

One major reason, he said, is Cisco’s close relationships with the world’s largest telecom firms. Starent products are deployed in 45 countries, but by far its biggest client is Verizon Wireless, America’s biggest cellphone carrier. Industry specialists have long warned that Starent would have to diversify its customer base in order to survive. Now Cisco’s global sales force will be offering Starent-designed networking gear to customers Starent couldn’t reach on its own.

“Being part of Cisco will allow us to bring this technology faster to more customers,’’ Maupile said.

The Starent deal continues Cisco’s aggressive campaign of expansion through acquisition, backed by the company’s $35 billion cash reserve.

In March, the company bought Pure Digital, maker of the popular Flip pocket video camera. And earlier this month, Cisco said it would spend $3 billion to acquire Tandberg ASA, a Norwegian maker of videoconferencing products.

Meanwhile, technology companies have been in a flurry of massive merger and acquisition deals in recent weeks. In September alone, Dell Inc. paid $3.9 billion for computer services firm Perot Systems Corp., while software company Adobe Inc. bought online marketing software maker Omniture Inc. for $1.8 billion, and Xerox Inc. bought Affiliated Computer Services Inc. for $6.4 billion.

Hiawatha Bray can be reached at bray@globe.com.