This year's most exciting takeover battle in tech may be nearing a conclusion. On Wednesday TomTom, maker of the ubiquitous GPS navigation devices, increased its bid for digital map-maker TeleAtlas by over 40% and snapped up 28% of the target's shares. This follows an earlier hostile effort by archrival Garmin from the US to prevent TomTom from gaining control over the only remaining independent provider of maps.
This expensive bidding war caps a wave of consolidation in the industry which pits the two market leaders against each other and both against a new, gigantic entrant. The opening shot of this set-piece was Nokia's agreement to acquire Navteq Corp, one of only two global providers of digital maps to the fast-growing GPS navigation industry. Pretty much all the sat nav device and navigation software vendors depend on either Navteq or TeleAtlas for maps. What Navteq and TeleAtlas do is expensive and time-consuming (hundreds of people driving around the world mapping roads), so they are not easily replaced.
Garmin primarily uses Navteq and TomTom uses TeleAtlas. In fact TomTom is TeleAtlas' largest customers, making up about 30% of revenues. So when Nokia bid for Navteq (having already acquired navigation software vendor Gate5 last year), alarm bells must have gone off at Garmin's beach HQ in the Cayman Islands. Nokia is gearing up to become a formidable competitor to the dedicated sat nav device market, planning to put GPS-absed navigation on both its high-end smartphones and mass market handsets. To protect its own source of maps, TomTom made a heavily geared bid to acquire TeleAtlas for a whopping €2.1bn.
The loser of this battle may well struggle to survive. US anti-trust officials have not opposed the merger, but the European watchdog is still considering it. They will of course require the winner to continue providing maps to the industry as a whole, including to the loser. But for the ultimate winner there are many ways to make life difficult for rivals. And huge margin benefits for itself -- saving TeleAtlas royalties could add as much as 15 or 20 points to TomTom's gross margin.
This is one fight TomTom cannot afford to lose. Last week Garmin countered TomTom's initial bid with an unsolicited €2.4bn offer. TomTom responded swiftly, raising its bid to €2.9bn this week. At the same time it acquired 28% of TeleAtlas' shares from its leading shareholder and in the open market, effectively blocking any possibility of a Garmin victory.
TomTom will surely win the day, but at what price?! Its latest bid represents an 81% premium to TeleAtlas stock price before the bidding began. TomTom will end up paying 9 x TeleAtlas' 2007 revenues or 38 x 2007 EBITDA. For TomTom it's a choice between Winner's Curse or likely demise. Meanwhile TeleAtlas' shareholders are laughing all the way to the bank.
From the sidelines, Microsoft and Google -- both of whom have a keen interest in mapping and navigation services for consumers -- are watching carefully... If anyone could afford to fund the creation of a brand-new provider of global digital maps, it's them. Watch this space.