, the battle for Dutch digital mapping company
is a fight for their future.
The two companies, best known for their automotive consumer navigation systems, run nearly head-to-head in global market share for their devices. Each hopes that the purchase of a mapping data provider yield a competitive edge.
Last week, Garmin raised the stakes in this battle further when it
launched an unsolicited 2.3 billion euro ($3.3 billion) bid for Tele Atlas to counter a three-month-old offer from its biggest competitor, TomTom.
Garmin's bid stunned investors and marked the beginning of what analysts see as an expensive bidding war. Indeed, one analyst believes Garmin is prepared to go as high as $5.5 billion.
For Garmin, the addition of Tele Atlas will help it break out of its mold as a hardware company and gain entry to new markets in wireless and automotive segments by offering better local search, 3D-mapping and real-time traffic flow data, the company has said.
But a victory for Garmin doesn't come without its share of problems.
CIBC analyst Yair Reiner believes with the cash in hand and debt, TomTom could raise the price for Tele Atlas as high as $5 to $5.5 billion.
"TomTom could see its proposed combination with Tele Atlas as a matter of life or death and will gradually raise its bid as high as its cash flow and capitalization will allow," Reiner said in a recent note to clients.
There's little doubt that TomTom will come back with a new bid -- something even Garmin has acknowledged in its recent conference call with analysts.
Shares of Tele Atlas were trading at $40.29 Monday, suggesting investors expect a higher counteroffer from TomTom.
That would force Garmin to raise its offer up to $59.32 a share. Reiner assigns a 40% probability to this scenario. CIBC makes a market in Garmin shares.
The possibility of such a bidding war has hurt Garmin's shares since its bid was announced. The stock was off another 4% on Monday to $94.32.
Given the health of its balance sheet, Garmin could effortlessly bid higher than TomTom, says Scott Sutherland, managing director and Garmin analyst at Wedbush Morgan.
"But it's more complex than the price," says Sutherland. "There are a lot of variables such as how dilutive the acquisition is and how easily Garmin can move its stuff over to Tele Atlas." Wedbush Morgan does not own shares or have an investment banking relationship with Garmin.
Garmin may end up with no choice but to pay a higher price after it was caught by surprise acquisition moves in the past few months involving the two key players in the mapping industry ---
and Tele Atlas.
TomTom got the ball rolling with its cash offer of 21.25 euros a share of Tele Atlas on July 23. The offer represented a 28% premium over the closing price of 16.55 euros a share on July 20, the last day before the bid for shares were made.
On Oct. 1, cell phone maker
surprised the industry with its $8.1 billion bid for Navteq -- a move that pushed Garmin tighter into a corner.
"Our consideration of an offer to acquire is really rather recent given the significant changes that have just recently taken place in the industry over the last 90 days," Kevin Rauckman, chief financial officer of Garmin acknowledged on a recent conference call, "and given those current moves toward consolidation in the sector we believe that now is the right time for us to combine with a mapping supplier."
Garmin has also largely been using rival Navteq's mapping data, so a switch to Tele Atlas would cause considerable integration problems and bode a very bumpy ride ahead for the company.
Garmin's options may have been further reduced by the fact that building its own maps database is an expensive option.
"It is an exceedingly difficult task to build the maps from scratch," said Cliff Pemble, chief operating officer of Garmin. "It's what we call technically possible, and there's certainly new technology that can be brought to bear in doing so, but it's a proposition that's got high risk from an execution point of view, and a very long time schedule."
Even if Garmin ultimately beats out TomTom for Tele Atlas, analysts are worried about the ease of integrating such a merger.
Garmin has relied on Navteq more than Tele Atlas to supply the mapping data. TomTom is culturally closer to Tele Atlas, says Sutherland.
Garmin has tried to play down the transition and has said that if it is successful in its bid for Tele Atlas, it anticipates over the next 12 to 24 months it can wind down its relationship with Navteq and move some products to Tele Atlas.
That's the dilemma for Garmin: win the battle for Tele Atlas and deal with perhaps years of integration challenges, or lose out to TomTom and face investors' wrath as the company's position in the market erodes.