Analysis of TomTom’s Offer for Tele Atlas



Blair Swedeen
Blair Swedeen
Blair Swedeen is the Principal of Partenza Consulting, a consultancy providing strategy, product, marketing and business development consulting services to the Location-Based Services industry. Previously, he spent three years at NAVTEQ with overall responsibility for the Internet/Wireless product strategy and product line.

Last week, TomTom issued an offer of ~$2.5B for Tele Atlas (TA) and plans on making TA a wholly-owned subsidiary continuing to offer map data to existing TA customers. First, while certainly a good deal for TA and TA’s investors, it's not completely clear why TomTom is making this bid. Here are a few potential reasons and a grade for TomTom on these dimensions:
1. Buying Revenue (C-): TomTom could conceivably pay a ~30% premium for the company, and then lose a large part of the 60% of TA's revenue not generated by TomTom as device makers migrate to the only other alternative, NAVTEQ.
2. Pre-empt Other Competitors (B): if TomTom was concerned that TA might fall into another suitor's hands, it could be a pre-emptive purchase on their part.
3. Reduce Supplier Quality Risk (B+): TomTom has lagged Garmin significantly in the US due to poor quality map data. If TomTom is to make significant share gains in the US, addressing the quality issue is important.
4. Reduce licensing expense over key component (C-): at PND pricing of at most $17/unit the percentage of the overall unit cost is less than 8% of the cheapest TomTom Go model. Furthermore, today you have two suppliers competing aggressively on price to win market share.
5. Buy customer relationships (B+): if TA is looking to become more of a navigation software platform and move into the installed navigation market, TA's vehicle OEM relationships could help make that move. However, the prior GDT GIS data business doesn't seem to have much of a place in a TomTom owned TA, and certainly does not represent the customer base TomTom would be interested in acquiring.

Second, given that so many players are making maps and navigation core pillars in their growth strategies this will probably be the opening salvo and not the final bid for either TA or NAVTEQ. The most likely potential suitors for either map company include the local search portals (Microsoft, Google, Yahoo), other device makers such as Nokia, Garmin, et al, and potentially a dark horse private equity/hedge fund player who could be interested in leveraging the business by adding debt to the balance sheet, increasing return-on-equity and riding the predictable cash flow in a hot market for an eventual sale after the LBS market structure is a bit more mature and valuations increase.

Third, Tele Atlas's vertical integration with a non-platform player such as TomTom, could face stiff resistance from anti-trust regulators in either the US or EU. For all intents and purposes, the digital map industry is a duopoly. With TA being a subsidiary of TomTom virtually all navigation device vendors would be compelled to go to NAVTEQ to avoid funding a direct competitor's device business through map data sales. Don't be surprised if this deal does not pass muster with regulators.

On the other hand, TA or NAVTEQ's acquisition by a broader platform company (as the local search portals are becoming) does not force the device market to move to NAVTEQ, the only remaining viable option. Instead, the acquisition could be viewed by regulators and the market as extending their horizontal web platform across portable devices and even installed systems. This would seem to make the most sense as portable navigation devices (PNDs) move to the "connected navigation" paradigm (e.g. Dash Navigation), while handsets become local search terminals (e.g. Nokia's N95) and navigation units (e.g. Nokia's 6610).

As the inventory of geo-referenced content sitting on top of the map grows, it is becoming the next area for differentiation in the LBS and navigation markets. With their broad distribution, content aggregation capabilities and ad-serving platforms, the local search portals could be better partners for map providers than individual device makers like TomTom.

A combined map + local search platform would allow the major internet brands to offer a full content solution to the installed and portable device industries for local search, directions and navigation. Combined with their ad serving platforms this could be the face of "Navigation 2.0".

The open question is whether the Local Search portals are willing to place a $2.5B bet at this stage in the local search market that local search will take off and make the acquisition eventually payout. However, even with the portals’ willingness to buy the map providers, anti-trust concerns will still be a significant issue.

Disclaimer: The opinions expressed herein are the personal opinions of the author and are not necessarily those of GPS Business News.

Monday, July 30th 2007
Blair Swedeen - blair@partenzaconsulting.com

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