On a dismal day for the markets in general, some investors had it worse than others. Shareholders of Motley Fool Stock Advisor recommendation Garmin (Nasdaq: GRMN ) saw the value of their shares plummet 11% yesterday. The catalyst: The GPS device manufacturer's bid for Euro-mapmaker Tele Atlas prompted the predicted response from initial suitor TomTom.
But let's begin at the beginning.
It all started in July, when TomTom initially bid less than seven times sales to acquire the unprofitable Tele Atlas. Three months later, cell phone kingpin Nokia (NYSE: NOK ) decided to grab a bigger slice of the lucrative GPS market by buying the other major global map provider, Navteq (NYSE: NVT ) . But as the supply of unwed mapmakers dwindled, their prices skyrocketed. Nokia would have to pay an astounding 11.8 times sales for Navteq. Fast-forward one month, and Garmin jumped into the race as well. Unwilling to match Nokia's offer for Navteq, Garmin instead outbid TomTom by 15%, offering 8.1 times sales to acquire Tele Atlas.
Or did it?
Personally, I read Garmin's bid as a gambit aimed solely at forcing TomTom to overpay to win Tele Atlas. And if that was the aim, Garmin has already succeeded. In an announcement released yesterday, TomTom upped its offer for Tele Atlas to $4.2 billion. Weighed against Tele Atlas' $413 million in trailing sales, that amounts to 10.2 times sales.
It's also a 26% premium to Garmin's initial offer, which means that we can explain Garmin's stock price collapse in either (or both) of two ways. First, Garmin must ante up roughly the same valuation that Nokia is paying for Navteq if it wants to beat TomTom's latest offer for Tele Atlas. Second, if Garmin doesn't pay up, it will be left partnerless, bereft of data, a GPS signal pinging in the wilderness, with no map to guide it.
No way will Garmin pay 10.2 times sales for a second-rate mapmaker, when for just a few euros more it could match Nokia's bid for Navteq and own its preferred data provider. The way I see it, Garmin might decide to abandon its Tele Atlas bid, and instead woo Navteq away from Nokia. But there's no reason to overpay for Tele Atlas anymore. It's time for Garmin to drop out. Result:
- TomTom wins its prize.
- TomTom overpays in the process.
- And Garmin still gets access to all the map data it can eat.