Nokia to Pay $8.1 Billion for Navteq
Nokia's agreement to buy Chicago-based Navteq for $8.1 billion—the handset maker's biggest acquisition to date—shows just how determined the Finnish company is to dominate the evolving business of mobile search. In fact, Nokia (NOK) may even be betting that it can become the mobile equivalent of Google (GOOG), as customers increasingly use its Internet-enabled handsets to look for help getting from one place to another as well as for information about what's available along the way.
Navteq (NVT), ranked No. 5 on BW's 2006 Hot Growth list (BusinessWeek, 11/6/06), is profitable and fast-growing, earning $109 million last year on sales of $582 million. But those numbers alone don't justify the purchase price, analysts say. "It's expensive," says analyst Richard Windsor of Nomura Securities in London. Investors agreed, driving Nokia shares down 2% in Helsinki trading following announcement of the deal on Oct. 1. Windsor questions whether customers will be willing to pay for navigation services that are available free from Google and other sources. "Nokia's business model in navigation is already broken," Windsor says.
Nokia Chief Financial Officer Richard Simonson responds that investors didn't initially understand the value that Navteq brings, but that it's starting to become clear. "Yes, it's a rich multiple if you look at it based on the price compared to sales and future earnings," he says. "But let's put it in perspective. Navteq is a $600 million company that has a great growth profile, and we need to pay for that." He's not alone in his confidence: Says analyst Mark McKechnie of American Technology Research in San Francisco, "The purchase price may seem rich relative to Nokia's trading multiples, but a small strategic price for Nokia to pay to drive its GPS business going forward."
Launching New Services
Nokia already dominates the global handset market, but now it is pushing hard into the mobile Internet. At an Aug. 29 London press conference, Nokia unveiled plans to launch a slew of services for mobile users (BusinessWeek, 8/29/07), starting later this year in Europe and Asia. The initiative includes an online music store aimed at the 200 million music-capable Nokia mobile phones already on the market, an interactive multiplayer-game service, and a new venue for Nokia handset users to swap photos, videos, and music. Nokia is taking the lead in pushing the mobile Internet after operators such as Vodafone (VOD) largely failed to attract a significant number of customers to their own wireless Web services.
The acquisition of Navteq, which provides the digital mapping information underlying navigation devices and Internet services, is based on the premise that location-based services (BusinessWeek, 9/14/07) could become one of the most important mobile applications. Search will become three-dimensional, taking advantage of the fact that users always have their handsets with them. "Telephones are becoming computers. One of the big things that will happen is adding location sensitivity. It's fundamental," Anssi Vanjoki, Nokia's general manager for multimedia, tells BusinessWeek.
In fact, there was speculation that Google also may have been bidding for Navteq, driving up the price. (Navteq shares have climbed nearly 20% since early September.) Nokia, which offered virtually no premium on Navteq's market value but is nevertheless paying 52 times Navteq's earnings, declined to comment on the speculation. The handset giant also was under pressure to make a deal after TomTom (TOM2.AS), Europe's leading maker of personal navigation devices, said on July 23 it would buy Tele Atlas (TA.AS) (BusinessWeek, 7/24/07), Navteq's major rival, for $2.8 billion in cash and debt. "That created an awkward situation [for Nokia] that would have been made worse if someone else had bought Navteq, particularly if it was Google," says Martin Garner, director of wireless intelligence at market watcher Ovum in London. "That would have left Nokia in quite a difficult position."
Still, $8.1 billion is a lot of money for a business that is still largely untested. And the acquisition carries numerous risks. As Nomura's Windsor points out, Navteq will have to work hard to reassure its existing customers such as Garmin (GRMN), a Kansas-based maker of portable navigation devices, that may regard Nokia as a competitor. Nokia's Vanjoki says that all Navteq customers will continue to have access to the latest mapping technology. "I'm sure Garmin and other customers will find this very beneficial," Vanjoki insists. Navteq CEO Judson Green sounds a similar tune. Under Nokia, he says, Navteq will remain an independent operating company, "with complete authority to serve all our customers with the same independent vision we've had at our company all along."
Now it's up to Nokia to prove that location-based services can be profitable (BusinessWeek, 10/13/06). Theoretically, customers will pay extra for information on current traffic patterns, and businesses such as restaurants or stores will pay to advertise to mobile-phone users in the neighborhood. But this vision has been talked about since the late 1990s and has yet to catch on big time. "We are still waiting to see exactly how you make money in this space," says Dan Bieler, director of consulting for European telecommunications and networking at Munich-based market-watcher IDC.
Nokia officials envision a world with a number of ways for mobile-phone makers and service providers to make money. Consumers might pay a subscription fee for access to an array of basic Internet services, but Nokia believes consumers also will be willing to pay for what Simonson calls "microtransactions." That's when users spend pennies for small bits of information, such as a detailed map that sends directions and points of interest along the way to, say, the precise movie theater they are interested in. While such services now exist in cars and PCs, customers are likely to pay for the convenience of having them instantly on the go. "We estimate that less than 1% of phones have maps and navigation on them," says Navteq's Green. "We're really at the cusp of location-based services becoming pervasive in our lives."
Nokia has proven that big, risky bets can pay off. Beginning in 1992 the former producer of rubber boots and timber products decided to shift to mobile technology, a transition that has become a corporate legend. Nokia clearly sees the purchase of Navteq as an essential part of its continuing effort to build more capability into its products, both to compensate for the inevitable decline in prices for basic mobile technology and to tap into the inexorable shift to wireless information services. Ovum's Garner predicts that this latest transition will be difficult, take several years, and expose Nokia to lots of criticism from investors. But he adds: "If anybody can do it, they can."