Garmin’s smart navigation of mapmaker bidding war puts it on top
By DAVID HAYES
The Kansas City Star
You got to know when to hold ’em, know when to fold ’em, know when to walk away and know when to run.
“THE GAMBLER,” AS RECORDED BY KENNY ROGERS
No one will ever confuse Garmin’s Min Kao, Cliff Pemble or Kevin Rauckman with Kenny Rogers.
But it’s probably a good idea to stay away from any poker table the company’s execs gather around.
In November 2007, Garmin walked away from a multibillion-dollar bidding war for Netherlands mapmaker Tele Atlas. At the time, some on Wall Street predicted the demise of Garmin and the rosy future of the winner of that bidding war, TomTom.
On Tuesday, 16 months later, TomTom wrote off a large part of its Tele Atlas purchase and could be headed for bankruptcy.
The Netherlands navigation company, Garmin’s largest competitor, wrote off $1.34 billion of the more than $4.2 billion it spent to buy the No. 2 digital mapmaking company.
“Tele Atlas is core to the strategy of the group; however, the worsening macro environment means that currently we cannot sustain the full valuation of the acquired business of Tele Atlas as established at the time of the acquisition,” TomTom said in reporting its fourth-quarter financial results.
TomTom reported a $1.26 billion loss for the fourth quarter, compared with a $136 million profit a year earlier. Sales for the quarter were $686.5 million. Sales for the year totaled $2.1 billion.
TomTom said the company would have difficulty staying within loan covenants for the Tele Atlas purchase. The company owes more than $1.4 billion.
“Given the uncertainties in the wider macro economic environment and their knock-on effect on consumer spending, scenarios can be envisaged where the loan covenants could be breached,” TomTom reported.
“As a result, the company continues to evaluate options aimed at remaining within its loan covenants under a variety of possible scenarios, which could include renegotiating the terms of the facility in isolation or in combination with other actions.”
The Garmin-TomTom bidding war for Tele Atlas was watched closely by Wall Street in 2007.
Digital maps are a key component for online and portable navigation, and TomTom in July 2007 surprised the industry by announcing its $2.8 billion purchase of Tele Atlas. The No. 2 mapmaker had never turned a profit but was TomTom’s primary map supplier.
Handset manufacturer Nokia added to the navigation corporate angst in October 2007 by announcing its $8.1 billion purchase of No. 1 mapmaker Navteq.
Navteq was Garmin’s primary map supplier, and the move led the Olathe company to make a competing bid for Tele Atlas. Garmin trumped TomTom’s bid by about $500 million.
TomTom countered, offering $4.2 billion — besting Garmin’s bid by $900 million.
Garmin’s execs walked away, announcing a long-term mapping deal with Navteq.
“Garmin chuckles as TomTom pays the piper,” wrote Motley Fool’s Rich Smith after the dust settled.
“Where most investors saw mortal danger to its business model, Garmin may have seen it as an opportunity to influence its archrival into seriously overpaying for Tele Atlas,” Smith wrote at the time.
“Garmin made a feint at Tele Atlas, to which TomTom responded with a raised bid, at which point Garmin gracefully exited the bidding war, leaving TomTom with its checkbook hanging open.”
Garmin execs have contended all along that the Tele Atlas bid was serious and not a “feint” to put TomTom on the financial ropes.Either way, by losing, Garmin became a winner.
As the bidding war began in 2007, Garmin was considered the U.S. leader in portable navigation, but TomTom generally was regarded as the world leader.
Sixteen months later, Garmin is regarded as the world’s No. 1 navigation company.
But victory hasn’t been good for investors.
The navigation industry had its best year ever in 2007, and — under the economic circumstances — a good year in 2008.
But Garmin and TomTom saw the on-paper value of the two companies drop by more than a combined $25 billion since late 2007.
TomTom, traded in Amsterdam, is valued by investors at $567 million — less than half its Tele Atlas write-off. Garmin, valued by Wall Street at $3.4 billion, lost 72 percent of its on-paper value the past 12 months.
Despite the weak financial report, TomTom shares Tuesday traded up 4 percent after hitting a 52-week low earlier.
On Monday, Garmin reported fourth-quarter sales of $1.04 billion, down 14 percent from $1.21 billion during the same period in 2007. Sales for the year reached $3.49 billion, up 10 percent for the year.
Garmin shares rose 7.3 percent Monday and another 4.8 percent Tuesday. Shares closed at $17.07, up 79 cents.