By William Patalon III
Money Morning/The Money Map Report
Garmin Ltd. (GRMN), the largest U.S. maker of satellite-navigation devices, dropped its $3.4 billion bid for digital-mapmaker Tele Atlas NV (TLATF), handing victory in the strategic bidding battle to European rival TomTom NV.
The strategic reversal by Garmin could put the George Town, Grand Cayman Islands-based company "in play," with such companies as Microsoft Corp.and Google Inc. as two of the likeliest suitors.
Garmin may be forced to sell out because the lack of proprietary-mapmaking technologies is likely to leave it at a competitive disadvantage down the road to such rivals as TomTom and wireless-phone giant Nokia Corp., (NOK).
Garmin will have to keep licensing digital maps and related technologies, which may mean that its technology won't be as comprehensive or up-to-date as TomTom's offerings. Indeed, over the long haul, owning Tele Atlas may provide Tom with a meaningful edge in the navigation-device market, which will rocket 20% to $10 billion this year, reports Canalys, an industry researcher based in the United Kingdom.
"The strategic disadvantage [it] will have will continue as an overhang" to Garmin's long-term competitiveness, Rich Valera, an analyst with Needham & Co. in New York, told Bloomberg News. Even so, Valera advises investors to hold their Garmin shares.
To create the digital mapping technologies like those of Navteq and Tele Atlas – which encompass 12 million miles of roadway in 200 countries – would require a capital outlay of about $1 billion and would take as long as a decade, Jeff Rath, an analyst with Canaccord Adams, told Bloomberg.
That financial reality means that Garmin probably won't try to simultaneously build a mapping division. And it also means that TomTom will be better positioned to beat back competitive assaults from the cellular phone sector, and will also generate additional revenue by licensing the mapping technology to other makers of wireless phone manufacturers and wireless-service providers.
"The most critical component to the device is the map," said Blair Swedeen, a principal with the San Francisco-based Partenza Consulting, which works with navigation-service companies. "This is really a move to become more of a service provider and have more ‘value-added' than just the hardware."
Garmin on Friday withdrew its hostile bid for Tele Atlas after it was able to add another six years to its existing contract with mapmaker Navteq Corp., (NVT). The contract extension with Navteq also has an option for four additional years.
On Oct. 1, cell-phone giant Nokia Corp. (NOK) stunned the market – and Garmin investors – by announcing plans to buy the Chicago-based Navteq Corp. (NVT), a leading digital mapmaker, for about $8.1 billion.
That announcement seemed to stun Garmin and launch it into action – even though Nokia reassured investors that Navteq would continue to sell to Garmin, even after the buyout. Even so, Garmin went hunting for a mapping firm of its own, and ultimately launched the counterstrike against TomTom, which had already launched its initial $2.8 billion offer for Tele Atlas. Garmin upped the ante with the $3.31 billion bid, prompting TomTom to sweeten its offer to $4.2 billion, or $43.63 per share.
Analysts predicted that Garmin would make a counter-offer of more than $60 a share for Tele Atlas. But some analysts said Garmin faced a major challenge, given that TomTom had already amassed a 28% stake in Tele Atlas – to only about 5% for Garmin. Garmin had the capital to make the high offer, analysts say.
But the acquisition and integration on this deal would have diluted Garmin's profit until 2010, American Technology Research analyst Rob Sanderson wrote in a Nov. 12 research note. Amsterdam-based TomTom, which already uses Tele Atlas more extensively, will absorb the company more easily, Sanderson wrote.
Nokia, the world's biggest mobile-phone maker, will add Global Positioning System (GPS) technology to "dozens" of models by the end of next year. The Finland-based Nokia and other cell-phone firms will sell 162 million GPS-equipped phones this year, dwarfing the projected sales of 20 million GPS devices that Garmin and TomTom will sell in aggregate. Four years from now, a total of 444 million wireless phones – about one-third of the total produced – will be GPS-enabled, predicts iSuppli Corp., an El Segundo, Calif.-based industry researcher.
This could all combine to put Garmin at a massive competitive disadvantage, Rath, the Vancouver-based Canaccord Adams analyst, hypothesizes.
"The company that owns that map will have an ability to have a better product," Rath said. "The company that [loses the bidding battle for Tele Atlas] will be forever in a strategic disadvantage." Even so, he, too, advised investors to hold their Garmin shares.
Garmin's shares soared to 97.51 Friday. "There's [substantial] relief because the bidding had gone to a level that people didn't like the earnings dilution," Needham & Co.'s Valera said.
Here is a Timeline of Events involving Garmin, TomTom and Tele Atlas, according to both Money Morning the International Business Times:
- Garmin sues TomTom in federal courts in Texas and Wisconsin, claiming patent infringement.
- Garmin asks British and Dutch courts to invalidate TomTom's registered designs and patents.
- TomTom counter-sues in Wisconsin, alleging Garmin infringed on its patents bought from California-based Horizon Navigation Inc.
- TomTom requests preliminary injunction against Garmin for reportedly copying one of its designs. Result: Denied.
- TomTom in July bids $2.8 billion for Tele Atlas.
- Nokia on Oct. 1 bids $8.1 billion for Navteq, the digital mapmaker Garmin uses for its digital mapmaking technology.
- Garmin bids $3.31 billion for Tele Atlas, and also takes a 5% stake in the target company.
- TomTom bids $4.2 billion for Tele Atlas, takes 28% stake in the target company.
- Companies settle patent disputes; Garmin weighs second counter-offer. Analysts expect it to go to $60 a share.
- Garmin withdraws from bidding battle for Tele Atlas; inks six-year contract extension of six years, with option for four additional years.
News and Related Story Links:
- Bloomberg News:
Garmin Withdraws Tele Atlas Bid, Ceding to TomTom.
- Money Morning News Analysis:
GPS Leader Garmin Weighs Counterstrike in Crucial Battle For Digital Mapmaker Tele Atlas; Settles Patent Dispute With Rival TomTom.
- Money Morning News Analysis:
TomTom Bangs Out Higher Bid For Mapmaker Tele Atlas.
- Seattle Post-Intelligencer.com:
- International Business Times:
Garmin Vs. TomTom: A Timeline of Litigation Over Tele Atlas.
- Money Morning News Analysis:
Garmin Takes 5% Stake in Tele Atlas, Company it is Pursuing in Hostile Bidding Battle
- Money Morning News:
Garmin Beats Earnings Estimates, Launches $3.31 Billion Hostile Bid for Tele Atlas; Shares Plunge
Tele Atlas Endorses $4.2B TomTom Bid.