Navigating for relevance in a changing landscape

-Email Thomas Rasmussen

It’s becoming increasingly evident that once-dominant makers of personal navigation devices, such as Garmin and TomTom, have lost their way. They have seen billions of dollars in market capitalization erased as smartphone manufacturers have encroached on their sector, largely through M&A. Consider the most-recent example of this trend: Research in Motion’s acquisition of startup Dash Navigation earlier this month.

RIM’s buy is more of a catch-up move than anything else. Rival Nokia has already spent the last few years – and several billion dollars – acquiring and building a dominant presence in the location-based-services (LBS) market. And let’s not forget about the omnipresent Google. Starting with its tiny 2005 purchase of Where2, the search giant has quietly grown into a LBS powerhouse that we suspect keeps even the larger players up at night.

The Dash Navigation sale may well signal the start of some overdue consolidation, a trend we outlined last year. Specifically, we wonder about the continued independence of TeleNav, Telmap and Networks in Motion. TeleNav, for instance, is the exclusive mapping provider for the hyped Palm Pre through Sprint Navigation. But with the trend for open devices, we wonder how long that will be the case.

What’s the outlook for mobile payment startups?

-Contact Thomas Rasmussen

The consolidation in the mobile payment market that we outlined recently is still on. Startup Boku announced on Tuesday a $13m venture capital infusion in the form of what we understand was a $3m series A round followed quickly by a $10m series B round a little over a month later. Benchmark Capital led the latest round, with Index Ventures and Khosla Ventures also pitching in some cash. The money was used to acquire two competitors, Paymo and Mobillcash. We estimate that very little of the cash was used to buy the vendors. We understand that the purchase of Paymo, which raised a reported $5m itself, was primarily done in stock. The deals were largely a way for Boku to gain customers and technology, as well as expand its international reach. It’s increasingly important for mobile payment startups to do something to stand out among the dozens of rivals also trying to crack this market. What’s unusual about Boku is that this strategy is playing out so quickly. The company only incorporated in March.

The real question for Boku and other promising startups in the mobile payment space such as RFinity is what will ultimately happen to this hyped market. Despite hundreds of millions of dollars poured into startups, they haven’t been able to generate much revenue, certainly not to the level that would make them viable businesses at this point. We believe the best outcome for these firms is an exit to a larger strategic acquirer. An example of this that may well be in the offing is Obopay, which took an investment from Nokia a few months ago. We suspect that could be a ‘try before you buy’ arrangement for the Finnish mobile company. Research in Motion and others could look to use acquisitions to catch up, as well.

However, we wonder how long it will be before other smartphone providers, platforms and mobile operators do as Apple has done. Micro-transactions are a huge selling point for the new iPhone 3.0 update and, frankly, one of the few bright spots for the mobile payment sector. However, all transactions for iPhone applications are done through Apple itself, leaving companies such as Boku out in the cold. If other vendors – including RIM, Palm Inc, Google, Microsoft and even application platforms like Facebook – stay in-house to develop the technology, there isn’t much need to go shopping. That could well hurt the valuations of mobile payment startups, even those that survive this current period of consolidation.

The saga of Certicom’s sale

Contact:  Brenon Daly

After more than two months of bid and counterbid, the saga of the sale of Certicom appears to be nearing its close. In early December, fellow Canadian tech company Research in Motion tossed out a low-ball bid of $1.21 for each of the 43.7 million shares of Certicom. Overall, that valued the cryptography vendor at some $53m. We should hasten to add that RIM’s offer was unsolicited.

Certicom, along with adviser TD Securities, mulled over the offer for about three weeks before saying ‘thanks but no thanks’ to RIM. Undeterred, RIM kept its bid alive for the next month, before officially pulling it January 20. Three days after that, VeriSign stepped in with an offer of $1.67 for each Certicom share, or a total of $73m.

Just last week, RIM reentered the picture with a bid of $2.44 per share, or about $106m. (Viewed another way, RIM’s new offer values Certicom at exactly twice the level as its initial bid.) As part of the terms, VeriSign now has until Wednesday to up its offer or see Certicom go to RIM. (The deal carries a $4m breakup fee.)

Of course, there could always be a third suitor in the picture. If we had to pick one likely candidate, we might tap IBM. Last April, Big Blue inked a ‘multiyear, multimillion-dollar’ license agreement with Certicom, and has already handed over a $2m upfront payment.

Location-based stalking?

Nokia has been going navi-crazy lately. Last week, the Finnish conglomerate bought location-based social networking company Plazes for an estimated $30m. This comes as the company is wrapping up the largest acquisition in its history – the $8.1bn purchase of Navteq. We believe this is just the beginning for Nokia and others in the excessively hyped mobile location-based services (LBS) space. The question arising from this acquisition, as well as Vodafone’s $48.7m acquisition of Zyb in May, is what these acquisitions mean for the rest of the market. One implication is already clear: GPS technology has been commodified. (Just ask shareholders of Garmin, who have seen the stock skid to a two-year low.) With this technology popping up on dozens of devices, we expect hardware vendors to be even more active in snapping up LBS startups.

Nokia plans to roll Plazes into its Nokia Maps division, which itself was formed from the acquisition of gate5 in late 2006. It is part of Nokia’s overall strategy to have GPS technology play a large role in expanding beyond just being a mobile hardware company. Nokia claims it will sell upward of 37 million GPS-enabled handsets this year alone. The approaching worldwide release of the GPS iPhone, as well as Research in Motion’s push to include the technology in most of its BlackBerry devices, make it clear why high-profile backers such as KPCB and Sequoia Capital are so excited about LBS applications.

Beyond being a simple technology purchase, however, Plazes and other future deals will likely bring another important component to the apps: users. Despite their hype and position as leaders in the space, services such as Palego’s Whrrl, Loopt and Brightkite have fewer than a million users combined. Compare that to the hundreds of millions of users that ‘traditional’ social-networking sites such as Facebook and MySpace command, and one wonders what the hype is all about. By pairing up with larger companies, however, the services get instant access to millions of users. It is the technology and expertise that rumored suitors such as Facebook, Microsoft, Google and now the mobile carriers and hardware manufacturers are interested in. With continued consolidation, the fear of being left behind in a potentially important market will drive many to acquire first and ask questions later. Nokia might have just lit the fire in the M&A race to dominate the LBS market.

Seven signs of a consolidating LBS industry

Announced Acquirer Target Deal value
June 2008 Nokia Plazes $30m*
June 2008 Polaris Hughes Telematics $700m
May 2008 Vodafone Zyb $48.7m
October 2007 Nokia Navteq $8.1bn
July 2007 TomTom Tele Atlas $2.8bn
July 2007 Springbank Resources Location Based Technologies (fka PocketFinder) $50m
August 2006 Nokia gate5 $250m*

*estimated, Source: The 451 M&A KnowledgeBase

Mapping vendor Garmin searches for direction

In a time of increasing competition and decreasing margins, the once-soaring navigation companies seem to have lost their bearings. Former Wall Street darlings Garmin and TomTom both reported lackluster quarters last month. Although overall revenue at both companies is still solid, other lines on the P&L sheet have deteriorated – notably margins. Both companies are now trading near 52-week lows, down roughly 70% from their highs for the year. (Undoubtedly, Garmin will face some investor ire when the company holds its shareholder meeting on June 6.)

With fierce consolidation and price declines, the issue facing Garmin and others is how to differentiate themselves from the new entrants that range from conglomerates Nokia and Research in Motion to small startups such as Dash Navigation. (Looming over all of this is the phenomenal success of Apple’s iPhone.) We foresee 2008 being a year of further consolidation as Garmin continues to shop in an attempt to retain its competitive edge.

Garmin’s gross margins are down to less than 50% from 70% just a few years ago and are expected to decline to below 40% this year, according to CFO Kevin Rauckman. The new competitive environment has forced a steep decline in average selling price: the company’s personal navigation device sold for $500 just a few years ago, but now the gizmo goes for half that amount. Garmin has stated that it intends to stave off the price erosion by setting up its products as a premium brand, much like what Apple did with the iPod. In order to achieve this, Garmin has been looking to make acquisitions in the content segment and will launch its first mobile phone, the Nuvifone, which looks, sounds and works eerily similar to a GPS-enabled iPhone.

So which companies might be ripe for the taking? Aside from the expected distribution acquisitions such as Garmin’s rumored purchase of Raymarine, mapping, traffic and content provider startups such as Dash, Inrix and Networks in Motion offer the kind of technology that Garmin needs. Moreover, if Garmin is serious about branching into the complex mobile phone market, a case could easily be made for an acquisition of longtime partner Palm Inc. The struggling pioneer was reportedly in play last year, but instead opted to have Elevation Partners take a 25% stake in the firm. Palm’s valuation has since been cut in half; we believe the company could surely be had for cheap as investors are eager to recoup their losses. Debt-free Garmin is cash-rich with about $600m, plus another $550m in marketable securities. So financing acquisitions is not a big issue for the company. The real question is whether Garmin can navigate a margin-boosting plan into place before it plummets off a cliff.

Signs of a consolidating industry

Announced Acquirer Target Deal value
Oct. 1, 2007 Nokia Navteq $8.1bn
July 23, 2007 TomTom Tele Atlas $2.8bn

Source: The 451 M&A KnowledgeBase