A study in FUD: This stock is not for the faint of heart.
Garmin's Worries Aren't Over
By Priya Ganapati
TheStreet.com Staff Reporter
11/19/2007 10:46 AM EST
SAN FRANCISCO -- Relieved investors may be cheering navigation devices maker Garmin's decision to drop out of a bruising bidding war with rival TomTom over Dutch mapping supplier Tele Atlas.
But questions about the company's long-term strategy remain.
Garmin decided Friday not to top TomTom's offer of $43.99 a share, or $4.2 billion, for Tele Atlas, and will instead extend its deal with Tele Atlas rival Navteq through 2015 with an option to renew it for another four years. Cell-phone maker Nokia announced last month it would acquire Navteq for $8.1 billion.
Garmin's attempt to stick to its current course sent the stock soaring more than 16% to $97.76 Friday; the stock was up another 50 cents in early trading Monday.
However, the company's latest move does not answer larger concerns about how it plans to hedge the risk it's taking now that it is dependent on a competitor for mapping data and where it will get the capability for real-time traffic information or better Internet-enabled local search capability -- features that Garmin cited as reasons for its Tele Atlas bid.
Not having Tele Atlas also could put Garmin in the position of having to build its own maps database and tools -- a process that it has conceded is expensive and risky.
To its credit, Garmin has walked away from a potentially crushing standoff. The company's decision to withdraw has saved it big bucks and forced TomTom to pay $1.5 billion more than it had planned. It has also allowed investors to focus on Garmin's strong fundamentals and growth, without the distraction of a difficult merger hanging over the company.
Garmin's decision to lock in a long-term contract with Navteq for mapping data, while seen as a positive development for the company, shouldn't come as a surprise.
Garmin is Navteq's biggest customer and in its announcement of its acquisition of Navteq, Nokia reassured its customers that it would like to keep Navteq as an independent player and ensure unfettered access to the data for all in the industry.
"The agreement allays dilution concerns and resolves many near-term uncertainties," says Yair Reiner, an analyst with CIBC Capital Markets in a note to clients. "But is it unclear how the Navteq contract gives Garmin the market leadership it sought in its bid for Tele Atlas." (CIBC makes a market in Garmin shares.)
Dropping out of the bidding war has alleviated investors' short-term concerns that Garmin may end up paying too much, adds Joe Biondo Jr., chief investment officer for Biondo Investment Advisors, which holds Garmin stock in its portfolio. "It still leaves the questions about whether Garmin's management team should have started this game."
For Garmin, the future still holds plenty of uncertainty. One big concern is where Garmin will get some of the features it was looking for from Tele Atlas.
Earlier this month, Garmin said buying Tele Atlas will help it offer a more realistic representation of surroundings, improved mobile search capabilities, including Internet-enabled local search, and extend itself into newer segments like in-dash, portable and mobile-phone navigation. Garmin also said owning Tele Atlas would provide it the ability to offer real-time content such as traffic data.
Although Friday's deal with Navteq gives Garmin a source from mapping data in the coming years, that situation could change if competitive pressures lead to friction with Nokia over the data.
For now, Nokia has promised to keep Navteq independent, but that could change because Nokia is nursing its own ambitions for the mobile navigation market -- a segment where it will run into Garmin as a competitor.
To protect itself from that scenario, Garmin has to start thinking of looking elsewhere for that capability. One alternative could be to buy startups or smaller specialized players in the mapping industry, says Mike Ippoliti, research director, telematics and automotive for independent research firm, ABI Research.
"They can probably get real-time traffic data from someone like IntelliOne or they could look at some of the Internet-connected navigation startups," he says. "The important thing is that they need to start going after some of the guys who are delivering this technology."
The other alternative is to build its own mapping system from scratch, an alternative Garmin has already conceded as difficult. "I think it is what we call technically possible, and there's certainly new technology that can be brought to bear in doing so," Garmin chief operating officer Cliff Pemble told analysts when discussing Garmin's bid. "It's a proposition that's got high risk from an execution point of view, a very long time schedule and it's also not inexpensive."
Garmin could spend anywhere upwards of $1 billion, which is what Navteq says it cost the company over 15 years to build its mapping tools and database. Although that's certainly cheaper than its $3.3 billion bid for Tele Atlas, it does not take into account the opportunity costs and the turmoil that such a project could bring internally in terms of demand on resources.
Also, without Tele Atlas or Navteq, Garmin remains a hardware company that's reliant on its rivals for its data and subject to gross margins pressure.
With increased competition and falling prices in the personal navigation devices segment, Garmin's holiday sales will be closely watched by analysts and investors.
"For a hardware company, gross margin is the name of the game," says Biondo. "Garmin can continue with volume sales growth but if there is pressure on the margins it will affect the valuation."
Garmin may have dropped out of the battle for Tele Atlas gracefully, but the war may have just begun.
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