When the best exit strategy for a stock is a buyout from a company that may not actually need the products or technology involved, it's tough for me to get all that excited. Be that as it may, the potential of a buyout has been the strongest bull argument for TomTom (OTCPK:TMOAY) (TOM2.AS) for over a year, as many have argued that Apple (NASDAQ:AAPL) needs to, or at least should, acquire TomTom to secure its position in mapping and location technology.
There's little argument that mapping/location/navigation technology is important for smartphone manufacturers, and increasingly for automobile manufacturers as well. Whether its important enough for another company to shell out the more than the $1.6 billion it would likely take to acquire TomTom is debatable. The rise of "social mapping" is creating more technology options and the sale of Nokia's (NYSE:NOK) handset business to Microsoft makes Nokia a more viable licensing partner. I'm not going to rule out the possibility of a company buying TomTom for its map assets, but the stock appears about 20% overvalued on its own independent merits and that makes this more of a binary story than I prefer.
A Necessary Asset … With Three Providers
Maps and GPS-based location/navigation functionality has become a virtual must-have for smartphone manufactures. That leads them to one of three providers - TomTom, Nokia, or Google (NASDAQ:GOOG). As OEMs have in the past proven reluctant to deal too extensively with their competition, TomTom has been a beneficiary as companies like Google, Sony, and Samsung have licensed their mapping technology.
Those relationships have been changing. Google has built and bought its own mapping technology, and its licensing payments to TomTom have been declining for a few years. At the same time, Nokia's exit from the handset business may make it a more suitable partner for other handset OEMs, and Samsung chose Nokia instead of TomTom as the map provider for its new Tizen OS.
On Its Own, The Future Is Looking Pretty Challenging
Making matters worse, it has been getting harder and harder for TomTom to compete and prosper in lines of business that have long provided a large percentage of its revenue and profits.
TomTom still gets about 60% of its revenue from its Consumer business, which includes newer products like GPS watches and more traditional personal navigation devices (aka PNDs). PNDs, including the portable GPS devices that can be mounted in a car, have long been the staple of this business. While TomTom has engineered some pretty clever products (including PNDs that can guide motorcyclists to winding roads or truckers to smoother routes with fewer hills or curves), would-be customers have increasingly turned to their smartphones as substitutes.
Even as TomTom has maintained about 50% share in Europe and roughly 20% share in North America (trailing Garmin (NASDAQ:GRMN)), the market has been eroding underneath the company at a double-digit pace. Strong growth in GPS watches (a roughly $1 billion market) has helped limit some of the damage, but it's hard to call the consumer business a healthy one for the long term.
TomTom has also had its challenges in the automotive space. TomTom management has claimed about 25% to 30% market share between hardware and content licensing, but Garmin has been making inroads on the hardware side and Google's Open Automotive Alliance is aiming for better integration between cars and Android devices. In addition, Nokia is particularly strong here with respect to in-dash mapping technology licensing agreements. So although TomTom can boast of relationships with leading in-car technology companies like Harman and Continental AG, this market too carries the risk of serious shifts in where/how the content value flows.
Does Apple Need TomTom?
It makes a certain amount of sense that Apple would want to secure mapping technology. The question is whether or not buying TomTom is the only, or best, way to achieve that goal. It used to be true that the map databases owned by TomTom and Nokia were highly valuable because of the expense and difficulty that a competitor would have to go to assemble their own. And that's still true at least in part - collecting data from utilities, governments, and other sources is not an easy (or cheap) undertaking. But with the rise of options like "social mapping" (where the routes of users are tracked and used to form maps), I wonder if there are some options.
Apple has definitely been an active acquirer of various mapping technologies. While TomTom has been underspending on R&D, Apple has been buying R&D-focused companies like Placebase, Poly9, C3 Technologies, Locationary, and Embark. These technologies may not replace or eliminate the need for TomTom's assets, but it may put Apple in a stronger bargaining position. Perhaps like how Lenovo waited out IBM and got a much better price on IBM's x86 server business, Apple may believe it has the time and assets on its side to drive a very hard bargain with TomTom.
A Hard Road On Its Own
If TomTom stays independent, I think it will be difficult for the company to grow revenue at a long-term rate much above the low single-digits. There's still growth potential in the auto market and in applications like commercial fleet management, but I expect the consumer business to face relentless pressure from smartphones and other multifunction devices, even if products like GPS provide some respite in the near term. As this is a business model that relies upon leveraging that central asset of mapping technology, I don't see especially bright prospects for free cash flow growth much in excess of revenue. With that, I think fair value for TomTom on a standalone basis is in the area of EUR 4.50 (or around $3/ADR).
The Bottom Line
While it is not unthinkable that Apple could have interest in products like GPS watches, in-car information systems, and perhaps even PNDs, the real asset to Apple would the core mapping/location technology. With that, TomTom could certainly be worth more to Apple than its standalone value (particularly considering that Google reportedly paid around $1 billion for Waze).
If Apple were to announce the acquisition of TomTom for $3.50, $4.00, or even more per share, I wouldn't be hugely shocked. On the other hand, I wouldn't be surprised if Apple never bought TomTom, trying instead to use its acquisitions to date to build what it needs and/or looking to license from TomTom or Nokia to fill in the gaps. Seeing as how I don't really like TomTom as a standalone business, buying the stock in the hope of an acquisition is more like gambling than investing for me, and not something I'm interested in right now.
Disclosure: I am long LNVGY, . I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.