Doubters fret at Nokia Navteq deal

But the logic is unassailable

Comment Nokia has spent the greatest part of its life being misunderstood by US stock analysts, and its move to acquire US mapping company Navteq, for a colossal $8.1bn, at $78 a share, is no exception.

Navteq had revenues last year of just $581m but is on track for about $800m this year, with its last quarter up 49 per cent to $202.3m. Most of that gain has been in portable devices, particularly wireless devices. Its net income and cash position has grown at around the same rate.

But financial analysts are still wary of the deal and are talking it down. However, if Navteq performs at that same level for just one or two more years, the price will have been more than repaid, and if it had paid less, there would have been counterbids.

At Rethink we spent the best part of 2003/4 arguing with finance analysts who said devices such as mobile handsets would inevitably have competitive price erosion, and therefore Nokia, as the biggest such device maker, would have the biggest erosion.

Instead Nokia, with the biggest market share in global handsets, has driven down its costs faster than its average sale price has fallen, increasing margins and generating piles and piles of cash – it has $12bn in the bank prior to the deal - which is best spent on essential services acquisition. Also, as more complex networks emerge, Nokia has been able to sell more complex devices at the higher end. So where Motorola has suffered from device commoditisation, Nokia has evaded it and resisted further price erosions.

But despite this, Nokia has changed its plan to become the handset platform of choice into the mobile internet platform of choice, and we would think that an acquisition of this nature gives it the stature to offer its own location based services without a three year run at the problem – which is what it would take if it built its own mapping division from scratch.

But instead of applauding, the big question being asked this week is why Nokia paid so much for Navteq. The result has been a drop overall in all handset makers' share prices, and talk of core Navteq customers like GPS specialist Garmin, and Google and Yahoo! Maps, going elsewhere for their maps, or buying a rival so they are not dependent upon Nokia.

One reaction was that Garmin must counter bid for Netherlands based Tele Atlas, which has a $2.6bn takeover offer on its plate from GPS player TomTom. Others are saying it's too late for Garmin and the bidders for Tele Atlas are likely to include Microsoft and Google. Investors were ditching TomTom shares early this week at the prospect of a bidding war.

There are other global mapping companies, but we need to think about just what it has taken to get this far in offering positioning systems for the handset. GPS chips and their antenna needed to shrink and someone needed to work out the revenue opportunities and how to bring it all together.

We have been talking about systems which know where a cellphone owner is and deliver relevant advertising, since we first heard that 3G would be able to offer Location Based Services through triangulation. That concept has gradually transmuted to using GPS, and chip makers are predicting a heyday over the next two years, as top end cellular devices all come with working GPS systems.

It was always assumed that using a 3G triangulation process to find a location meant that these services would come from cellular operators who would own the triangulation data.

Now it's clear that this is not the way to bring that to market, a handset maker like Nokia can offer "over the top" services without any reference to a operator, something that has typified its stance in recent weeks as it pursues an orchestrated transition into a mobile portal player with its music store, its advertising acquisition Enpocket, DVB-H TV services and now this move into maps.

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