Mba Tomtom merger TeleAtlas

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Financial Management
Acquisition of TeleAtlas by TomTom

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  • 1. Financial Management Acquisition of TeleAtlas by TomTom EMBA – 09 Jassar El Jabouri Atsuyo Kawaguchi-Van Mil Martijn van der Knaap Roel Kock Krzysztof Lewinski Antoinette Meys Date: 19 December 2008
  • 2. 1. TomTom - Tele Atlas Description of products 4 1.1. TomTom 4 1.1.1.The company 4 1.1.2.The competitors 4 1.1.3.The customers 4 1.2.TeleAtlas 4 1.2.1.The company 4 1.2.2.The competitors 5 1.2.3.The customers 5 2. Financial Analyses without acquisition 6 2.1. TOMTOM 6 2.1.1. Net Income Statement of TomTom without acquisition 6 2.1.2. Balance Sheet of TomTom without acquisition 7 2.1.3. Cash Flow of TomTom without acquisition 10 2.1.4. Financial Ratios of TomTom without acquisition 13 2.1.5. Value of TomTom without acquisition 21 2.1.6. Real Options for TomTom without acquisition 22 2.2. TeleAtlas 23 2.2.1. Net Income Statement of TeleAtlas without acquisition 23 2.2.2. Balance sheet of TeleAtlas without acquisition 24 2.2.3. Cash Flow of TeleAtlas without acquisition 25 2.2.4. Financial ratios of TeleAtlas without acquisition 27 2.2.5. Value of TeleAtlas without acquisition 35 2.2.6. Real options for TeleAtlas without acquisition 36 3. Financial Analyses after acquisition 37 3.1. Acquisition of TeleAtlas through shares of TomTom 37 3.1.1. Net Income Statement of TomTom after acquisition through issue of shares 37 3.1.2. Balance sheet of TomTom after acquisition through issue of shares 38 3.1.3. Cash Flow of TomTom after acquisition through issue of shares 39 3.1.4. Value of TomTom after acquisition of TeleAtlas through issue of shares 40 2
  • 3. 3.2. Acquisition of TeleAtlas through bank loan of TomTom 41 3.2.1. Net Income Statement of TomTom after acquisition with bank loan 41 3.2.2. Balance sheet of TomTom after acquisition with bank loan 42 3.2.3. Cash Flow of TomTom after acquisition with bank loan 43 3.2.3. Value of TomTom after acquisition of TeleAtlas with bank loan 44 4. Stock Exchange by Rappaport 45 4.1. No Synergies / Extra shares 45 4.2. Synergies / Extra shares 46 4.3. No Synergies / Bank loan 47 5. Advise 48 6. What happened? 49 3
  • 4. 1. TomTom - Tele Atlas Description of products 1.1. TomTom 1.1.1.The company TomTom NV is one of the world’s largest navigation solution providers and is based in Amsterdam, Netherlands. TomTom’s products include both navigation hardware as well as navigation software. TomTom offers a wide range of portable navigation systems for automobiles, small personal computers, and mobile phones. 1.1.2.The competitors TomTom is the dominant brand in European market with more than 50% market share. In the US market, TomTom currently holds a 21 % share and it’s largest competitor Garmin, the No. 1 global manufacturer, dominates the U.S. market with a more than 50 % share. On the whole the two companies are roughly even with world market shares of 33%. Then there's competition from other players, including Magellan Navigation, and Taiwan's Mitac International. Mitac is selling devices at dramatically reduced prices, forcing Garmin and TomTom to follow suit. In addition, cell-phone makers such as market leader Nokia are incorporating navigation technology directly into handsets that it may be the largest threat to the original personal navigation manufacturers. Nokia plans to include navigation features in roughly half of its phones in the next two to four years. While TomTom will sell 14 million to 15 million devices this year, Nokia will sell some 400 million phones this year, roughly half of which will be navigation-ready. 1.1.3.The customers The market of GPS devices is expected to grow in coming years as described later in the chapter. However, gradually the market is ending its fast-growth phase and moving into a stage of maturity. As the trend of mobile phones with the navigation features is expected, TomTom and other GPS device manufacturers are forced to leverage their strategies to survive in the market. 1.2.TeleAtlas 1.2.1.The company Tele Atlas is a Netherlands-based company founded in 1984 which delivers digital maps and other dynamic content for navigation and location-based services, including personal and in-car navigation systems, and provides data used in a wide range of mobile and internet map applications. Since 30 July 2008, the company has been a wholly-owned subsidiary of automotive navigation system manufacturer TomTom. The company provides maps covering 200 countries around the world 4
  • 5. 1.2.2.The competitors NavTeq is the competitor of TeleAtlas. The company was acquired by Nokia in 2007. Across the markets in North America and Europe, NavTeq has a significant market lead over TeleAtlas. Based on 2007 revenue analysis, it is estimated that NavTeq has a 59% share of the market and TeleAtlas 28%. The NavTeq and TeleAtlas market shares are expected to shift, as navigation delivery platforms expand, especially in the smartphone market. NavTeq has a market lead over TeleAtlas in Europe and North America, across navigation delivery platforms, and NavTeq is well positioned to leverage from Nokia ownership. 1.2.3.The customers Worldwide shipments of GPS-integrated mobile devices will grow at the rate of nearly 40% over the next five years, reaching 834 million units in 2012. Mobile handsets and smartphones are expected to be major devices in the future, however, the current personal navigation devices (PND’s) will remain the most widely used and preferred navigation choice in the next three years. Some key findings: • Currently, Japan has the highest in-vehicle navigation system penetration followed by North American and European countries. • The 2008 Olympic Games in Beijing and Shanghai World Expo in 2010 are expected to trigger an explosion in the commercial telematics market in China. • With the rapid development of GPS market in countries like China and India, majority of navigation systems are anticipated to be shipped in Asia- Pacific by 2012. • Taiwan has emerged as a manufacturing destination for GPS products on the global map, attracting major players to set up their production facilities in the country. • With the growing demand for navigational services, the global market for Location Based Services (LBS) is likely to grow at a CAGR of more than 104%. • As of 2007, PNDs dominated the GPS device market with more than 90% market share. However, this share is expected to get disturbed by the availability of GPS-enabled handsets that will account for an estimated 78% market share by 2012 end. • Opportunities remain untapped for various vertical segments of GPS market, like in new advanced access devices, chipset availability, and PND market. 5
  • 6. 2. Financial Analyses without acquisition 2.1. TOMTOM In 2007 TomTom revenues have increased with PND’s have increased with 104%. And as quote in the annual report by Harold Goddijn (CEO) “The first thing to say about 2007 is that it was the most successful year in TomTom’s history so far.” And TomTom says it can look forward to the future with confidence. We can conclude from this that the credit crisis did not reached TomTom (yet). The analysis of TomTom is done from the 2007 perfective. 2.1.1. Net Income Statement of TomTom without acquisition If TomTom can achieve the forecasts, it will in 9 years TomTom sales rose from € 192 million to 5,825 million an increase of almost 3000%. The net profit rose even more (3700%). From the net income statement (incl.forecast) we can see that TomTom has large amounts of retained earnings which will influence their cash position and the equity. Net Income Statement Annual Reports Forecasts (amount * € 1000) 2004 2005 2006 2007 2008 2009 2010 2011 2012 OPERATING INCOME (Revenue) 192,429 720,031 1,363,758 1,737,133 2,212,732 2,818,543 3,590,214 4,573,157 5,825,214 Costs of Sales 107,192 409,194 785,131 972,949 1,239,327 1,578,635 2,010,839 2,561,375 3,262,638 GROSS MARGIN 85,237 310,837 578,627 764,184 973,405 1,239,908 1,579,375 2,011,782 2,562,576 Operating expsenses 41,800 115,760 238,410 336,372 428,465 545,772 695,196 885,529 1,127,973 TOTAL OPERATING EXPENSES 148,992 524,954 1,023,541 1,309,321 1,667,792 2,124,407 2,706,035 3,446,904 4,390,611 OPERATING RESULTS 43,437 195,077 340,217 427,812 544,940 694,136 884,179 1,126,253 1,434,603 Interest income 169 3,136 9,400 20,102 25,606 32,616 41,546 52,920 67,409 Exchange rate (losses) (436) 12,275 (32,266) (16,330) (20,801) (26,496) (33,750) (42,990) (54,760) Financial expenses / interest costs (507) (747) (1,815) (981) (1,250) (1,592) (2,027) (2,583) (3,290) FINANCIAL RESULTS (774) 14,664 (24,681) 2,791 3,555 4,528 5,768 7,348 9,359 Results of participations before taxes 0 0 0 758 0 0 0 0 0 INCOME BEFORE TAXES 42,663 209,741 315,536 431,361 548,495 698,664 889,947 1,133,601 1,443,962 Income taxes 14,946 66,784 93,355 114,119 145,108 184,836 235,441 299,900 382,008 INCOME AFTER TAXES 27,717 142,957 222,181 317,242 403,388 513,829 654,507 833,700 1,061,954 6
  • 7. Assumptions on net income statement • In 2006 to 2007, Sales grew with 27.38%. In the annual report of 2007, TomTom states that it wishes to maintain its market leading position and increase its footprint worldwide by increasing its width and depth op product range. TomTom also illustrates that it expects the car navigation section to increase by 25%-30% a year (see graph). This growth rate is used in all variables in the net income statement. • The interest income grows also with 27% a year. Currently TomTom receives approximately 3.5% interest on its liquid assets. With a growth of 27% on interest this percentage decreases slightly to 2.5%-3.0%. • The exchange rate losses also grow with 27%. Whether or not this is due to lack of hedge of currency risk due to transactions with foreign manufactures, as the costs of sale rise with 27% it is expected that these exchange rate losses will also have the same growth. • No dividend is being paid to shareholders but reinvested in the company (see balance sheet retained earnings). 7
  • 8. 2.1.2. Balance Sheet of TomTom without acquisition The large amount of retained earnings are added to the equity of TomTom. The balance sheet shows a large amount of cash and retained earnings. The investors in TomTom will more or less demand that TomTom has a strategy for this money because investors don’t want money on the bank. They could have done that themselves. So based on this forecast one might suspect that TomTom needs a goal for their retained earnings. Balance Sheet Annual Reports Forecasts (amount * € 1000) 2004 2005 2006 2007 2008 2009 2010 2011 2012 Intangible fixed assets 960 15,845 39,183 56,344 81,021 116,506 167,532 240,906 346,416 Tangible fixed assets 2,050 5,168 7,926 17,824 22,704 28,920 36,838 46,923 59,770 Financial fixed assets 0 1,307 12,061 841,151 841,151 841,151 841,151 841,151 841,151 FIXED ASSETS 3,010 22,320 59,170 915,319 944,876 986,577 1,045,521 1,128,980 1,247,337 Stocks / Inventory 13,402 103,183 123,005 130,675 166,452 212,024 270,072 344,014 438,199 Receivables 34,358 157,376 282,310 433,563 552,266 703,467 896,065 1,141,393 1,453,888 Securities 0 3,651 682 26,695 26,695 26,695 26,695 26,695 26,695 Liquid assets 40,167 178,377 437,801 463,339 750,543 1,112,327 1,567,335 2,138,538 2,854,081 CURRENT ASSETS 87,927 442,587 843,798 1,054,272 1,495,956 2,054,512 2,760,167 3,650,640 4,772,863 TOTAL ASSETS 90,937 463,600 902,968 1,969,591 2,440,832 3,041,089 3,805,687 4,779,620 6,020,200 Share capital 18 21,456 22,584 24,357 24,357 24,357 24,357 24,357 24,357 Share premium 619 115,091 115,075 566,736 566,736 566,736 566,736 566,736 566,736 Legal Reserves 946 1,740 2,804 5,832 5,832 5,832 5,832 5,832 5,832 Stock compensation Reserve 2,629 11,662 32,364 58,765 58,765 58,765 58,765 58,765 58,765 Retained earnings 33,594 156,394 377,963 696,660 1,100,048 1,613,876 2,268,383 3,102,083 4,164,037 EQUITY 37,806 306,343 550,790 1,352,350 1,755,738 2,269,566 2,924,073 3,757,773 4,819,727 Provisions 394 20,981 9,682 41,624 53,020 67,536 86,026 109,579 139,580 Other long term liabilities 1,301 1,057 1,300 789 789 789 789 789 789 LONG TERM LIABILITIES 1,695 22,038 10,982 42,413 53,809 68,325 86,815 110,368 140,369 Payables (trade creditors) 25,608 55,390 66,744 151,859 193,436 246,395 313,854 399,782 509,236 Other current liabilities 25,828 79,829 240,349 368,624 368,626 368,627 368,628 368,629 368,630 Provisions 0 0 34,103 54,345 69,224 88,176 112,317 143,068 182,238 CURRENT LIABILITIES 51,436 135,219 341,196 574,828 631,285 703,198 794,799 911,479 1,060,104 TOTAL LABILITIES & EQUITY 90,937 463,600 902,968 1,969,591 2,440,832 3,041,089 3,805,687 4,779,620 6,020,200 8
  • 9. Assumptions on Balance sheet 2008-2012 • Intangible fixed assets are e.g. developed software. Intangible fixed assets will grow with the growth rate of the previous year. • Tangible fixed assets are property, plant and equipment. Tangible fixed assets will grow with the sales growth of 27%. • Financial Fixed Assets (investment in TeleAtlas) remains constant (29.90% of shares of TeleAtlas) for the amount of € 816 million. • Stock, receivables and payables are determined by maintaining the rate (Inventory Turnover, DSO, DPO) constant. • Other current liabilities will grow with the growth rate of the previous year. • Provisions (e.g. warranties) grow with the same percentage (27%) as the sales. • Profit is added to the retained earnings. No dividend is being paid out. All other equity remains constant. • Other long term liabilities and securities remain constant. • The increase in total equity is caused by the issue of shares (On 7 December 2007, TomTom placed 8.156.250 new ordinary shares with a nominal value of 20 cents at a market price of € 56 per share raising a net proceeds of approximately € 450 million) and retained earnings. • The 29.9% of TeleAtlas was funded by € 450 proceeds of new shares and past retained earnings. Since the total take-over of TeleAtlas is finalized in 2008 the figures here above are not included in the TeleAtlas figures. 9
  • 10. 2.1.3. Cash Flow of TomTom without acquisition (amount * € 1000) 2004 2005 2006 2007 2008 2009 2010 2011 2012 Net Income 43,437 195,077 340,217 427,812 544,940 694,136 884,179 1,126,253 1,434,603 Realised financial losses (451) 8,604 (19,890) (24,658) 0 0 0 0 0 Depreciation 836 1,844 4,393 6,867 8,747 11,142 14,192 18,078 23,027 Amortisation of intangible assets 292 1,579 13,800 16,611 21,159 26,952 34,331 43,730 55,702 Change in Provisions 324 20,888 22,840 52,223 26,275 33,468 42,631 54,303 69,171 Change in stock compensation Reserve 2,511 8,974 20,776 27,587 0 0 0 0 0 Increase in Inventory (11,184) (89,781) (19,822) (7,670) (35,777) (45,572) (58,049) (73,941) (94,185) Increase in receivables and prepayments (23,677) (121,710) (125,695) (162,577) (118,703) (151,201) (192,598) (245,328) (312,495) Increase in current liabilities 32,376 76,928 155,499 199,204 41,578 52,961 67,460 85,929 109,455 Cash Generated from Operations 44,464 102,403 392,118 535,399 488,220 621,885 792,147 1,009,024 1,285,278 Interest received 169 3,136 9,400 20,102 25,606 32,616 41,546 52,920 67,409 Interest paid & Financial costs 0 (747) (1,815) (981) (22,050) (28,088) (35,777) (45,573) (58,050) Corporate income taxes paid (8,387) (61,781) (108,196) (113,407) (145,108) (184,836) (235,441) (299,900) (382,008) Net Cash Flow from Operating actvities 36,246 43,011 291,507 441,113 346,667 441,578 562,475 716,471 912,629 Investments in associate 0 0 0 816,030 0 0 0 0 0 Investments in intangible assets 653 16,464 21,419 33,771 45,836 62,437 85,357 117,104 161,212 Investments in property 2,321 4,957 7,151 16,766 13,627 17,358 22,110 28,164 35,874 Cash Flow used in investments 2,974 21,421 28,570 866,567 59,463 79,794 107,467 145,268 197,087 Free Cash Flow 33,272 21,590 262,937 (425,454) 287,204 361,784 455,008 571,203 715,542 Cash flow from financing activities 0 116,546 1,113 453,417 0 0 0 0 0 Change in cash 33,272 138,136 264,050 27,963 287,204 361,784 455,008 571,203 715,542 Effect of exchange rates (75) 4,626 2,425 0 0 0 0 0 Net change in cash 33,272 138,211 259,424 25,538 287,204 361,784 455,008 571,203 715,542 Operating Results The operating result taken from the net income statement. Realised financial losses The changes in “realised financial losses” could not be extracted from either the net income statement or the balance sheet. Thus for the years 2004-2007 the amounts for the cash flow were taken from the annual reports from TomTom. The forecasts amount were put to zero and it is assumed that the “realised financial losses” are taken into account in the forecasted interest paid & financial costs. 10
  • 11. Depreciation and Amortization The depreciation and amortization are taken from the annual report until 2007. Since the depreciation and amortization have not been mentioned on the Net Income statement the depreciation and amortization are assumed to grow with the same percentage as the annual sales (27%). Change in provision Changes in balance sheet item provision. For the years 2004-2007 the amount in the cash flows stated were given by the annual report of TomTom and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are calculated based on the changes in the annual report. Change in stock compensation The costs for stock compensation is part of the Operating Expenses at TomTom. The difference between the reservation and payout of stock compensation could not be calculated from the annual report. So for the forecasted year it is assumed that the reservation and the payout are equal to each other. The stock compensation costs are part of the Operational Expenses (personal). Increase in inventory Changes in balance sheet item inventory. Increase in receivables and prepayments Changes in balance sheet item receivables and prepayments. For the years 2004-2007 the amount stated in the cash flows were given by the annual report of TomTom and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are calculated based on the changes in the annual report. Increase in current liabilities Changes in balance sheet item payables and other current liabilities. For the years 2004-2007 the amount stated in the cash flows were given by the annual report of TomTom and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are calculated based on the changes in the annual report. Interest paid and received The interest paid and received is taken from the Net Income statement item “interest income and financial expenses”. Corporate income taxes paid For the years 2004-2007 the amount stated in the cash flows were given by the annual report of TomTom and could not be ‘recalculated’ based on the information given in the annual report. The forecasts for the amounts of taxes are taken from the Net Income Statement. So all taxes are paid out directly. 11
  • 12. Investments in associate Changes in balance sheet item “investments” for the years 2004-2007 are based on the amount stated in the cash flows were given by the annual report of TomTom and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are calculated based on the changes in the annual report item assets. Investments in intangible assets and property Changes in balance sheet item intangible assets and property for the years 2004-2007 are based on the amount stated in the cash flows were given by the annual report of TomTom and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are calculated based on the changes in the annual report item assets and corrected for the depreciation and amortization of intangible assets. Cash flow from financing activities On 7 December 2007, the company placed 8,156,250 new ordinary shares of € 20 cents at a price of € 56 per share, raising new proceeds of approximately € 453 million. 12
  • 13. 2.1.4. Financial Ratios of TomTom without acquisition Profit Ratio’s Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 Gross margin 44.3% 43.2% 42.4% 44.0% 44.0% 44.0% 44.0% 44.0% 44.0% Operating margin 22.6% 27.1% 24.9% 24.6% 24.6% 24.6% 24.6% 24.6% 24.6% ROS (Net profit margin) 14.4% 19.9% 16.3% 18.3% 18.2% 18.2% 18.2% 18.2% 18.2% ROE 73.3% 46.7% 40.3% 23.5% 23.0% 22.6% 22.4% 22.2% 22.0% ROA 30.5% 30.8% 24.6% 16.1% 16.5% 16.9% 17.2% 17.4% 17.6% Gross Margin Calculation of 2007 ratio 80,0% Gross margin Operating margin Gross Margin (764,184) 70,0% = 44.0% ROS (Net profit margin) Sales (1,737,133) 60,0% ROE 50,0% ROA TomTom gross margin is stable and ranges between 42%-44%. This indicates that TomTom is not losing any gross margin on costs of sales. 40,0% Knowing that the prices of TomTom products are under pressure, 30,0% it means that either TomTom is also decreasing its costs of sales or that TomTom is introducing new products that are not subject to price pressure. 20,0% 10,0% Operating Margin 0,0% Calculation of 2007 ratio 2004 2005 2006 2007 2008 2009 2010 2011 2012 Operating results (427,812) Annual Reports Forecasts = 24.6% Sales (1,737,133) The operating margin shows the same development as the gross margin. This indicates that TomTom is still controlling it own operating expenses. 13
  • 14. Return on Sales (ROS) Calculation of 2007 ratio Net Income (317,242) = 18.3% Sales (1,737,133) Return on Sales is just as the other two profit ratios more or less stable and telling the same story. Return on equity (ROE) Calculation of 2007 ratio Net income (317,242) = 23.5% Common equity (1,352,350) The ROE has been decreasing for TomTom. This is largely caused by the rapid increase in equity in the recent year. Especially the increase in 2007 for the 29.9% of TeleAtlas made the ROE decrease further. In addition, the increase in equity was not equal to the increase of net income. Since TomTom has high R&D spendings and High Technical Staff, the shareholders want a to have high ROE in return for the high risk that they run. Return on assets (ROA) Calculation of 2007 ratio Net income (317,242) = 16.1% Assets (1,969,591) The ROA shows that same picture as the ROE. Conclusion profit ratio’s Despite the fact that TomTom faces price pressure it is still able to maintain high margins on their products. This in combination with a yearly growth of 27% is a good and healthy financial foundation for the company. 14
  • 15. Assets management ratio’s Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 Inventory TurnOver (IT) 14.4 7.0 11.1 13.3 13.3 13.3 13.3 13.3 13.3 Days Sales Outstanding (DSO) 65.2 79.8 75.6 91.1 91.1 91.1 91.1 91.1 91.1 Days Payables Outstanding (DPO) 87.2 49.4 31.0 57.0 57.0 57.0 57.0 57.0 57.0 Inventory turnover (IT) Inventory TurnOver (IT) Days Sales Outstanding (DSO) Calculation of 2007 ratio Days Payables Outstanding (DPO) 100,0 Sales (1,737,133) 90,0 = 13.3 Turns 80,0 Inventory (130,675) 70,0 60,0 TomTom sells its total inventory 13 times a year. 50,0 Since data from this industry is not available, it is not possible to make 40,0 a comparison. 30,0 20,0 Days sales outstanding (DSO) 10,0 Calculation of 2007 ratio - 2004 2005 2006 2007 2008 2009 2010 2011 2012 Receivables (433,563) = 91.1 Days Annual Reports Forecasts Sales : 365 (1,737,133 : 365) TomTom has its receivables paid after 91 days. So sales revenue are tied up in receivables for 91 days. The DSO is increasing which means that it takes TomTom longer to collect its receivables. The cashflow of TomTom is decreasing as a result of this increase in number of days. A increase of 1 day means that approximately an additional € 5 million is tied up in receivables. 15
  • 16. Days payables outstanding (DPO) Calculation of 2007 ratio Payables (151,859) = 57.0 Days Purchases : 365 (972,949 : 365) TomTom pays its bills within 57 days. This is much faster than TomTom collects its receivables. Roughly it can be said that TomTom finances everything that it sells for more than a month (91 days – 57 days). Cash flow would be made available if TomTom is able to increase its number of DPO. Conclusion on Asset management ratio’s The increase in DSO is decreasing the cash flow of TomTom but as can be seen with the other ratio’s TomTom is (currently) not in need of more cash flows. 16
  • 17. Debt ratio’s Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 Current Ratio 1.7 3.3 2.5 1.8 2.4 2.9 3.5 4.0 4.5 Acid Test (Quick) 1.4 2.5 2.1 1.6 2.1 2.6 3.1 3.6 4.1 Debt Ratio 58% 34% 39% 31% 28% 25% 23% 21% 20% Times-interest Earned 85.7 261.1 187.4 436.1 436.1 436.1 436.1 436.1 436.1 Current ratio Calculation of 2007 ratio 5,0 4,5 Current assets (1,054,272) 4,0 = 1.8 Current liabilities (574,828) 3,5 3,0 A liquid asset is one that can be easily converted into cash without significant 2,5 price decrease. A normal time span for conversion is one year. 2,0 The current ratio for TomTom in 2007 is 1.8. TomTom has a factor 1.8 more current assets than current liabilities. So if all current liabilities are paid back 1,5 TomTom still has about € 500 million on current liabilities. 1,0 Current Ratio The ratio’s from the annual report and the forecasted ratios are increasing 0,5 Acid Test (Quick) and this is commonly used as a measure of short term solvency. - A decrease of the ratio would indicate that current liabilities are rising faster than current assets. 2004 2005 2006 2007 2008 2009 2010 2011 2012 Annual Reports Forecasts Acid test Calculation of 2007 ratio Current assets - inventory (1,054,272 – 130,675) = 1.6 Current liabilities (574,828) The inventory of a firm is commonly known as the least liquid asset and might therefore, if necessary, be sold but with a loss. When measuring the short term solvency, it is common to take the inventory not into account. The acid test for TomTom shows the same picture as the current ratio. This indicates that TomTom has a good short term solvency without taking inventory into account. 17
  • 18. Debt ratio 70% Calculation of 2007 ratio 60% Debt Ratio Debt (617,241) 50% = 31.3% 40% Assets (1,969,591) 30% The debt ratio measures the percentage of funds provided by sources other than equity. 20% For TomTom this percentage is 31%. Banks like a low debt ratio because it gives them more 10% protection in case of financial distress of a company. The debt ratio of TomTom is rather low but 0% this is mainly caused by retained earnings and the premium on past issued shares. 2004 2005 2006 2007 2008 2009 2010 2011 2012 These two count for 1.2 million of the total assets. Annual Reports Forecasts Times interest earned 500,0 Calculation of 2007 ratio 450,0 400,0 EBIT (427,812) 350,0 = 436.1 300,0 Interest (981) 250,0 200,0 TomTom has a lot of EBIT which may decrease significant before TomTom is unable to pay the 150,0 interest on its loans. This is quite obvious because the balance sheet of TomTom shows now 100,0 Times-interest Earned large bank loans or other debts (other current liabilities are not interest bearing liabilities). 50,0 The TIE and Debt Ratio show the same picture. TomTom has not a large amount of outstanding - 2004 2005 2006 2007 2008 2009 2010 2011 2012 debt and is mostly funded with equity. Annual Reports Forecasts Conclusion on debt ratio’s All the debt ratio’s tell the same story; TomTom a little debt. This is off course quite in line with a company that has these large profits and cash flows. 18
  • 19. Other Ratios Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 NOPAT 28.491 128.293 246.862 313.693 399.833 509.300 648.738 826.353 1.052.595 Operating Cash Flow 29.327 130.137 251.255 320.560 408.580 520.442 662.931 844.431 1.075.622 Net Operating Working Capital 36.491 307.368 502.602 479.444 864.671 1.351.315 1.965.368 2.739.161 3.712.759 Operating Capital 39.501 329.688 561.772 1.394.763 1.809.547 2.337.891 3.010.888 3.868.141 4.960.096 ROIC 72,13% 38,91% 43,94% 22,49% 22,10% 21,78% 21,55% 21,36% 21,22% Nopat Calculation of 2007 ratio 6.000.000 NOPAT Ebit (427,812) – Tax (114,119) = 313,693 5.000.000 Operating Cash Flow Net Operating Working Capital Due to constant growth in sales the Nopat shows a steady growth. 4.000.000 Operating Capital 3.000.000 Operating Cash Flow 2.000.000 Calculation of 2007 ratio 1.000.000 Nopat (313,693) + Depreciation (6,867) = 320,560 0 Since depreciation as a growth factor of 27% (just as sales) the Operating Cash Flow 2004 2005 2006 2007 2008 2009 2010 2011 2012 Also shows a steady growth year after year. Annual Reports Forecasts Net operating working capital Calculation of 2007 ratio Current assets (1,054,272) – Current liabilities (574,828) = 479,444 The current radio of 1.8 in 2007 shows the same steady growth as the Net Operating working Capital. 19
  • 20. Operating capital Calculation of 2007 ratio Net operating working capital (479,444) + Net fixed assets (915319) = 1,394,763 Return on Invested Capital Calculation of 2007 ratio Nopat (313,693) = 22.49 Operating Capital (1,394,763) Conclusion on other ratio’s Every year TomTom gets more and more cash flow. This makes TomTom a financial riche and healthy company. 20
  • 21. 2.1.5. Value of TomTom without acquisition Common Stock Valuation The free cash flow in 2007 amounts to € 390.000.000 (29.9% investment in TeleAtlas have been taken out of the calculation). The growth of the free cash flows is expected to be 15.7% from 2007 till 2012. In addition, TomTom has 121.785.000 shares outstanding and its share price is quoted on the stock exchange at € 52 per share. (€ 390,000,000 / 121,785,000) * 1.157 = € 52 (R – 0.157) Required Rate of Return = 22.82% (close to ROE in 2007) Shareholders value of TomTom based on current share price is € 52 times number of shares (121,785,000) = € 6,332,820,000 2004 2005 2006 2007 2008 2009 2010 2011 2012 Free Cash Flow 33,272,000 21,590,000 262,937,000 390,546,000 287,204,293 361,783,618 455,007,746 571,203,465 715,542,470 Number of Shares 1,824,000 107,281,000 112,921,000 121,785,000 121,785,000 121,785,000 121,785,000 121,785,000 121,785,000 R 22.82% 22.82% 22.82% 22.82% 22.82% 22.82% 22.82% 22.82% 22.82% Growth 15.7% 15.7% 15.7% 15.7% 15.7% 15.7% 15.7% 15.7% 15.7% Share Price 296.42 3.27 37.84 52.11 38.32 48.27 60.71 76.22 95.48 Value of TomTom 540,670,000 350,837,500 4,272,726,250 6,346,372,500 4,667,069,756 5,878,983,794 7,393,875,867 9,282,056,306 11,627,565,138 NPV of Cash Flows All forecasted cash flows and the Cash Flow which includes the perpetuities (715,542 / 0,22) are discounted at 22% worth approximately € 4,500 Million. The total assets of TomTom are worth € 1.9 million (see balance sheet 2007) so the NPV of TomTom is positive. (amount * € 1000) 2008 2009 2010 2011 2012 Perpetuities Total Free Cash Flow 287.204 361.784 455.008 571.203 715.542 NPV Free Cash Flow 235.413 243.069 250.576 257.841 264.750 3.252.466 4.504.115 Analysis of the value The value of TomTom done by free cash flows for 2006 look quite accurate (see graph in chapter 6). In 2008 and 2009 TomTom has a small decrease in Free Cash Flow and this is shown in a decrease in stock price. The NPV of the Free Cash Flow give TomTom a value of € 4.5 billion (end of 2007). This above the value on the stock exchange (€ 6 Billion). The stockowner of TomTom might ‘brighten’ the future of TomTom and have already discounted future profits of 21
  • 22. TomTom the price. TomTom is already called the ‘stock sweatheart’. At that point in time the conservative investor was questioning whether TomTom could maintain this steep growth rate. 2.1.6. Real Options for TomTom without acquisition For the calculations of the fair value of the share options granted TomTom calculates with a expected volatility of 40% and a risk free rate of 3.96% (both are stated in the annual report of TomTom). Total 2008 2009 2010 2011 2012 NPV of Free Cash InFlow 1.551.678 284.153 296.680 309.759 323.414 337.672 NPV of free Cash Outflows (investments) 300.029 48.740 53.611 59.183 65.574 72.922 Ps (NPV Free Cash InFlow) 1,551,678 Pe (NPV Free Cash OutFlow) 300,029 Volatility 0.4 r 0.0396 d 5 Discount factor 0.22 X = ln(1,551,678/300,029) + (0.0.396 + 0.5*0.40)*5 = 2,009040568 √0.40 * √5 Y = 2,009040568 - 1,414213562 = 0,594827 Premium = (1,551,678 * N(2.009040568)) – (300,029 * (2.7183 ^ - 0.0396 *5) * N(0,594827)) Premium = (1,551,678 * 0.9773) – (300,029 * (0.820368767) * 0.7257) = 1,337,835.16 22
  • 23. 2.2. TeleAtlas 2.2.1. Net Income Statement of TeleAtlas without acquisition In 2007 TeleAtlas has record revenues of € 308 million (increase of 17%). But despite this fact TeleAtlas has serieus issues with their costs. Excluding a ‘one time’ cost correction the company has never booked any black numbers. So either the sales have to increase further (more then costs) or the costs have to come down. Net Income Statement Annual Reports Forecasts (amount * € 1,000) 2004 2005 2006 2007 2008 2009 2010 2011 2012 NET SALES 127,682 200,068 264,307 308,031 369,637 443,565 532,278 638,733 766,480 Costs of Revenue 16,527 28,407 25,673 31,751 38,101 45,721 54,866 65,839 79,007 GROSS MARGIN 111,155 171,661 238,634 276,280 331,536 397,843 477,412 572,894 687,473 Personnel 85,375 116,722 131,084 137,504 165,005 198,006 237,607 285,128 342,154 Reversal of impairment intangible assets 0 0 0 (23,074) Depreciation and amortization 40,116 52,330 50,177 53,323 53,557 55,893 58,436 61,218 64,277 Other Operating Expenses 52,844 59,643 85,696 98,418 118,102 141,722 170,066 204,080 244,895 OPERATING EXPENSES (Incl. COS) 190,243 257,102 292,630 297,922 374,764 441,342 520,975 616,265 730,333 OPERATING RESULTS (7,485) (24,170) (17,307) 25,029 (5,127) 2,223 11,302 22,468 36,146 Financial income 0 2,713 5,611 8,118 9,742 11,690 14,028 16,833 20,200 Financial expenses 3,521 810 8,676 441 529 635 762 914 1,097 FINANCIAL RESULTS (3,521) 1,903 (3,065) 7,677 9,212 11,055 13,266 15,919 19,103 INCOME BEFORE TAXES (11,006) (22,267) (20,372) 32,706 4,085 13,277 24,568 38,387 55,249 Income taxes (5,231) (648) (1,401) 8,341 1,042 3,386 6,266 9,790 14,090 INCOME AFTER TAXES (5,775) (21,619) (18,971) 24,365 3,043 9,891 18,303 28,597 41,159 EXTRA-ORDINARY RESULTS 805 (221) 0 0 0 0 0 0 0 EXTRA-ORDINARY RESULTS AFTER TAXES 0 (221) 0 0 0 0 0 0 0 NET GROUP INCOME (4,970) (21,840) (18,971) 24,365 3,043 9,891 18,303 28,597 41,159 Assumptions on net income statement • Sales growth between 2008-2012 is 20% (annual report of TeleAtlas 2007). • All variables except for Depreciation and Tax grow with the same 20%. • The depreciation rate of fixed assets (18%) remains constant and determines the depreciation in the net income statement. • The tax rate remains stable at 25%. 23
  • 24. • For Reversal of Impairment intangible assets, in 2003, TeleAtlas recognized an impairment loss on intangible assets and goodwill. As a result of impairment testing in 2007, TeleAtlas reversed the impairment loss on intangible assets for an amount of € 23,074. It can be expected that more reversal impairment will occur in the future. The growth of these have been estimated based on revenue growth. 24
  • 25. 2.2.2. Balance sheet of TeleAtlas without acquisition TeleAtlas has quite large cash amount to their position. The interest from that cash is increasing their net income but for a company that is struggling to make a profit they might wanna invest this money because now it is only gaining a 4%. Balance Sheet Annual Reports Forecasts (amount * € 1,000) 2004 2005 2006 2007 2008 2009 2010 2011 2012 Intangible fixed assets 275,218 284,021 247,030 255,347 263,944 272,830 282,016 291,511 301,326 Tangible fixed assets 10,131 10,599 18,681 22,345 26,728 31,970 38,240 45,741 54,712 Financial fixed assets 21,291 17,857 19,308 19,845 19,845 19,845 19,845 19,845 19,845 FIXED ASSETS 306,640 312,477 285,019 297,537 310,517 324,645 340,101 357,097 375,882 Stocks / Inventory 571 907 1,118 986 1,183 1,420 1,704 2,045 2,453 Receivables 38,217 47,481 78,252 106,726 128,071 153,685 184,423 221,307 265,568 Liquid assets 44,920 200,795 202,481 209,571 196,339 188,146 186,246 192,152 207,690 CURRENT ASSETS 83,708 249,183 281,851 317,283 325,593 343,251 372,372 415,504 475,712 TOTAL ASSETS 390,348 561,660 566,870 614,820 636,110 667,896 712,474 772,600 851,595 EQUITY 299,688 475,820 467,470 523,589 526,632 536,524 554,826 583,424 624,583 Other long term liabilities 43,166 22,633 22,749 24,565 29,478 35,374 42,448 50,938 61,126 LONG TERM LIABILITIES 43,166 22,633 22,749 24,565 29,478 35,374 42,448 50,938 61,126 Payables (trade creditors) 10,554 14,135 18,110 14,243 17,092 20,510 24,612 29,534 35,441 Other current liabilities 36,940 49,072 58,541 52,423 62,908 75,489 90,587 108,704 130,445 CURRENT LIABILITIES 47,494 63,207 76,651 66,666 79,999 95,999 115,199 138,239 165,886 TOTAL LIABILITIES 390,348 561,660 566,870 614,820 636,110 667,896 712,474 772,600 851,595 Assumptions: • Intangible fixed assets are e.g. software. Intangible fixed assets will grow with the growth rate of the previous year. • Tangible fixed assets are property, plant and equipment. Tangible fixed assets will grow with the growth rate of the previous year. • Financial fixed assets remains constant. • Stock, Receivables and trade creditors are determined by maintaining the rate (Inventory Turnover, DSO, DPO) constant. • Equity is mainly issued stock and past retained earning or losses. • Current long term and other current liabilities grow with the same percentage as the sales growth (20%). 25
  • 26. 2.2.3. Cash Flow of TeleAtlas without acquisition (amount * € 1,000) 2004 2005 2006 2007 2008 2009 2010 2011 2012 Operating results (7,485) (24,170) (17,307) 25,029 (5,127) 2,223 11,302 22,468 36,146 Reversal of impairment on intangible 0 0 0 (23,074) 0 0 0 0 0 Depreciation 40,116 52,330 50,177 53,323 53,557 55,893 58,436 61,218 64,277 Share based compensation 4,585 19,444 21,907 16,754 0 0 0 0 0 Change in non-current liabilities 904 164 292 (1,022) (21,542) (25,851) (31,021) (37,225) (44,670) Change in net working Capital (6,594) 3,731 (19,654) (34,168) 18,246 21,895 26,275 31,529 37,835 Interest received 436 1,363 4,611 7,480 9,742 11,690 14,028 16,833 20,200 Interest paid (1,635) (584) (455) (291) (529) (635) (762) (914) (1,097) Tax Paid (642) (1,352) (233) (9,998) (1,042) (3,386) (6,266) (9,790) (14,090) Cash Generated from Operations 29,685 50,926 39,338 34,033 53,304 61,829 71,992 84,120 98,601 Investments in associate 84,930 6,600 12,892 19,262 0 0 0 0 0 Investments in intangible assets 0 241 2,382 1,593 8,597 8,886 9,186 9,495 9,815 Investments in property 5,494 5,931 14,521 12,784 57,939 61,135 64,707 68,719 73,249 Capitalization of database and tools 59,695 32,864 11,016 14,920 0 0 0 0 0 Cash Flow from investments 150,119 45,636 40,811 48,559 66,536 70,022 73,892 78,213 83,063 Free Cash Flow (120,434) 5,290 (1,473) (14,526) (13,232) (8,193) (1,900) 5,906 15,538 Repayment of long-term borrowing (14,000) - - - 0 0 0 0 0 Issue of ordinary shares 168,299 145,379 (2,907) - 0 0 0 0 0 Exercise of stock options 841 5,427 4,586 19,178 0 0 0 0 0 Proceeds from short term borrowing - - 1,480 2,438 0 0 0 0 0 Cash flow from financing activities 155,140 150,806 3,159 21,616 0 0 0 0 0 Net Cash from investing 756 (221) 0 0 0 0 0 0 0 Change in cash 35,462 155,875 1,686 7,090 (13,232) (8,193) (1,900) 5,906 15,538 Operating Result The operating result is taken from the P&L of the corresponding year. Reversal of impairment on intangible assets The reversal of impairment on intangible assets is taken from the net income statements. This amount is deducted from the cash flow because it does not generate cash flows. 26
  • 27. Depreciation Depreciation and Amortization are both taken from the Net Income Statement. Share based compensation The changes in share based compensation have been taken from the annual report until 2007. The share based compensation is part of the staffing costs in the net income statement. For the forecasted cash flow statement it is assumed that these share based compensation is paid out directly. The stock compensation costs are part of the Operational Expenses (personal). Change in non-current liablities Changes in balance sheet item receivables and stock/inventory. For the years 2004-2007 the amount in the cash flows stated were given by the annual report of TeleAtlas and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are calculated based on the changes in the annual report. Change in net working capital Changes in balance sheet item total debt. For the years 2004-2007 the amount in the cash flows stated were given by the annual report of TeleAtlas and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are calculated based on the changes in the annual report. Interest received, paid and tax paid For the years 2004-2007 the amount in the cash flows stated were given by the annual report of TeleAtlas and could not be ‘recalculated’ based on the information given in the annual report. The forecasts amounts are based items in the amount stated in the net income statement. The changes in Cash Flow used in intangible assets and property The changes in cash flow used for the intangible assets and property have been taken from the annual report until 2007. The future changes are taken from the Balance Sheet and corrected for depreciation. 27
  • 28. 2.2.4. Financial ratio’s of TeleAtlas without acquisition Profit ratio’s Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 Gross margin 87,1% 85,8% 90,3% 89,7% 89,7% 89,7% 89,7% 89,7% 89,7% Operating margin -5,9% -12,1% -6,5% 8,1% -1,4% 0,5% 2,1% 3,5% 4,7% ROS (Net Profit Margin) -3,9% -10,9% -7,2% 7,9% 0,8% 2,2% 3,4% 4,5% 5,4% ROE -1,7% -4,6% -4,1% 4,7% 0,6% 1,8% 3,3% 4,9% 6,6% ROA -1,3% -3,9% -3,3% 4,0% 0,5% 1,5% 2,6% 3,7% 4,8% Gross Margin Gross margin Calculation of 2007 ratio Operating margin ROS (Net Profit Margin) ROE Gross Margin (276,280) = 89.7% 100,0% ROA Sales (308,031) 80,0% TeleAtlas has a large gross margin on their product. This might indicate that it does not need to buy a lot of material and 60,0% mainly produces the products them selves. 40,0% Operating Margin 20,0% Calculation of 2007 ratio 0,0% Operating results (25,029) 2004 2005 2006 2007 2008 2009 2010 2011 2012 = 8.1% -20,0% Annual Reports Forecasts Sales (308,031) In the annual report all operating margin except for 2007 were negative. A positive gross margin and a negative operating margin indicates the TeleAtlas is spending a lot of money (mainly personnel expenses and other expenses, like communication, travel and outsourcing costs). In 2007 TeleAtlas made a profit due to a one time ‘reversal of costs’. Return on Sales (ROS) Calculation of 2007 ratio 28
  • 29. Net Income (24,365) = 7.9% Sales (308,031) ROE shows the same picture as the Operating Margin. Return on equity (ROE) Calculation of 2007 ratio Net income (24,365) = 4.7% Common equity (523,589) The ROE is extremely small for a company like TeleAtlas. Since this ROE is so small share holders will only invest in the company if they think the stock has upward potential in the future. Return on assets (ROA) Calculation of 2007 ratio Net income (24,365) = 4.0% Assets (614,820) TeleAtlas has little debts so that is why the ROA shows the same trend as the ROE. Conclusion on profit margins ratio’s TeleAtlas future is brighten but the company is still struggling with their overall costs to turn to profit. Sales are rising but so are the costs. 29
  • 30. Assets management ratio’s Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 Inventory TurnOver (IT) 223,6 220,6 236,4 312,4 312,4 312,4 312,4 312,4 312,4 Days Sales Outstanding (DSO) 109,2 86,6 108,1 126,5 126,5 126,5 126,5 126,5 126,5 Days Payables Outstanding (DPO) 233,1 181,6 257,5 163,7 163,7 163,7 163,7 163,7 163,7 Inventory turnover Inventory TurnOver (IT) Calculation of 2007 ratio Days Sales Outstanding (DSO) 350,0 Days Payables Outstanding (DPO) Sales (308,031) = 312.4 Turns 300,0 Inventory (986) 250,0 TeleAtlas has a high inventory turnover but since this is an electronic 200,0 Product the inventory turnover should be extremely high. 150,0 Days sales outstanding (DSO) 100,0 Calculation of 2007 ratio 50,0 Receivables (106,726) 0,0 = 126.5 Days Sales : 365 (308,031: 365) 2004 2005 2006 2007 2008 2009 2010 2011 2012 Annual Reports Forecasts TeleAtlas is in a B-2-B market and a DSO of 126 days seems rather high. This DSO is decreasing the cash flow of TeleAtlas. 30
  • 31. Days payables outstanding (DPO) Calculation of 2007 ratio Payables (14,243) = 163.7Days Purchases : 365 (31,751 : 365) A DPO of 163 is high but for TeleAtlas this is increasing their cash flows. But unfortunately the amount in the DPO is rather small so the impact is also small. Conclusion on assets management ratio’s The assets management ratio’s look but their impact for TeleAtlas is rather small. The DPO has little impact on the Cash Flow because of the small amount of payables. The same accounts for inventory turnover. The DSO (about 4 months) look rather large. A decrease in number of days would be favorable for the Cash Flows. 31
  • 32. Debt ratios Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 Current ratio 1,76 3,94 3,68 4,76 4,07 3,58 3,23 3,01 2,87 Acid test 1,75 3,93 3,66 4,74 4,06 3,56 3,22 2,99 2,85 Debt Ratio 23% 15% 18% 15% 17% 20% 22% 24% 27% Time-interest earned -2,13 -29,84 -1,99 56,76 -9,69 3,50 14,83 24,57 32,94 Current ratio Calculation of 2007 ratio 5,00 4,50 Current assets (317,283) = 4.76 4,00 Current liabilities (66,666) 3,50 3,00 TeleAtlas has large current ratio which indicates that the company has a healty 2,50 Solvency. 2,00 1,50 Acid test 1,00 Current ratio 0,50 Acid test Calculation of 2007 ratio 0,00 Current assets - inventory (317,283 - 986) 2004 2005 2006 2007 2008 2009 2010 2011 2012 = 4.74 Current liabilities (66,666) Annual Reports Forecasts The high Acid Test reveals that TeleAtlas does not hold large amounts of inventory that might decrease their solvency. 32
  • 33. Debt ratio 30% Calculation of 2007 ratio 25% Debt (91,231) 20% = 14.83% Assets (614,820) 15% 10% The debt ratio indicated that TeleAtlas does not have a lot of debt. Most of their funding is done 5% Debt Ratio with equity. 0% Times interest earned 2004 2005 2006 2007 2008 2009 2010 2011 2012 Annual Reports Forecasts Calculation of 2007 ratio 70,00 Time-interest earned EBIT (25,029) 60,00 = 56.8 50,00 Interest (441) 40,00 30,00 20,00 Since TeleAtlas also makes losses in the analyzed period the Times Interest Earned are quite 10,00 heavily fluctuating. 0,00 -10,00 2004 2005 2006 2007 2008 2009 2010 2011 2012 Conclusion on debt ratio’s -20,00 Annual Reports Forecasts TeleAtlas has enough solvency for the coming years. But the losses make them vulnerable for -30,00 future loans. Banks are not to enthusiastic to lent to a loss making company. -40,00 33
  • 34. Other Ratio’s Annual Reports Forecasts 2004 2005 2006 2007 2008 2009 2010 2011 2012 NOPAT (2.254) (23.522) (15.906) 16.688 (6.169) (1.164) 5.037 12.678 22.056 Net Operating Working Capital 36.214 185.976 205.200 250.617 245.594 247.252 257.173 277.265 309.826 Operating Capital 342.854 498.453 490.219 548.154 556.110 571.897 597.275 634.362 685.708 ROIC -0,7% -4,7% -3,2% 3,0% -1,1% -0,2% 0,8% 2,0% 3,2% Nopat 800.000 Calculation of 2007 ratio NOPAT 700.000 Net Operating Working Capital Operating Capital Ebit (25,029) – Tax (8341) = 16,688 600.000 As can be seen in the forecasted profits TeleAtlas is not making profit until 500.000 2010. In 2007 they made a profit because of a ‘one time’ reversed cost. 400.000 Net operating working capital 300.000 200.000 Calculation of 2007 ratio 100.000 Current assets (317,283) – Current liabilities (66,666) = 250,617 - As shown with the debt ratio TeleAtlas has enough solvency. (100.000) 2004 2005 2006 2007 2008 2009 2010 2011 2012 Operating capital Annual Reports Forecasts Calculation of 2007 ratio Net operating working capital (250,617) + Net fixed assets (297,537) = 548,154 The operational capital shows a steady increase of all the years. 34
  • 35. Return on Invested Capital Calculation of 2007 ratio 4,0% Nopat (16,688) 3,0% ROIC = 3.0% Operating Capital (548,154) 2,0% 1,0% Because of the fact that TeleAtlas is make losses in several years the 0,0% ROIC is fluctuating quite heavily. 2004 2005 2006 2007 2008 2009 2010 2011 2012 -1,0% Conclusion on other ratio’s -2,0% Annual Reports Forecasts The graph with nopat and net operating working capital who’s a good picture of TeleAtlas. Solvency is healty but they are hardly -3,0% making any profit. Investors must have seen some future profits -4,0% for TeleAtlas and that is why they still have sufficient capital. If TeleAtlas losses the trust of the investors they might run -5,0% Into future funding problems. -6,0% 35
  • 36. 2.2.5. Value of TeleAtlas without acquisition Common Stock Valuation The free cash flow in 2007 amounts to € - 14,526. The growth of the free cash flows is expected to be 40%. In addition, TeleAtlas has 92,306,432 shares outstanding and the share price is quoted on the stock exchange at € 16.57 per share. This quoted share price is the price before the takeover bidding started. TomTom paid 181% the share price (30/1.81=16.57) (€ -14,526,000 / 92,306,432) * 1.40 = € 16.57 (R – 0.40) = 0.3987 This Required Rate of Return is 39.87%. TeleAtlas has a discount percentage of 25.83% (stated in the annual report), which in the above mentioned formula should indicate a negative growth. A Required Rate of Return and negative growth cannot be used to determine value of TeleAtlas on the Stock Exchange. Value of TeleAtlas based on current share price is € 16.57 times number of shares (92,306,432) = € 1,529,517,578 NPV Calculation All forecasted cash flows and the Cash Flow for the perpetuities (15,538 / 0,2583) are discounted at 25.83% and are worth approximately € 50 Million. TeleAtlas total assets are worth € 566 million (see balance sheet 2007). Thus, the NPV of TeleAtlas is negative. Cash Flow Forecasts 2008 2009 2010 2011 2012 Perpetuities Total Free Cash Flow 13.232- 8.193- 1.900- 5.906 15.538 NPV of Free Cash InFlow 10.516- 5.174- 954- 2.356 4.926 60.155 50.792 Analysis of the value Stock investors are willing to pay € 1.5 billion for TeleAtlas. A company with a negative net income and negative cash flow. So the investors must see some really bright future for TeleAtlas. The question remain whether the investors did foresee a possible takeover by a company like TomTom? 36
  • 37. 2.2.6. Real options for TeleAtlas without acquisition For the calculations of the fair value of the share options granted TeleAtlas calculates with a expected volatility of 50% and a risk free rate of 4.0% (both are stated in the annual report of TeleAtlas). Cash Flow Forecasts 2008 2009 2010 2011 2012 Perpetuities Total NPV of Free Cash InFlow (10.516) (5.174) (954) 2.356 4.926 60.155 50.792 NPV of free Cash Outflows (investments) 52.878 44.225 37.089 31.199 26.332 191.723 Ps (NPV Free Cash InFlow) 50,792 Pe (NPV Free Cash OutFlow) 191,723 Volatility 0.50% r 0.04 d 5 Discount factor 25,83 (given by annual report) X = ln(50,792 / 191,723) + (0.04 + (0.5*0.40)*5 = -0,090725582 √0.50 * √5 Y -0,090725582 - 1,414213562 = -1,504939144 Premium = (50,792* - N(0,090725582)) – (191,723* (2.7183 ^- 0.04 *5) * - N(1,504939144)) Premium = (50,792* 0.4600) – (191,723* (0.818729658) * 0.0668 = 33,849.87 37
  • 38. 3. Financial Analyses after acquisition 3.1. Acquisition of TeleAtlas through shares of TomTom TomTom acquires TeleAtlas for € 30 per share. TeleAtlas has 92,306,432 shares outstanding of which TomTom already owns 29.9%. The remaining shares will cost TomTom in total (number of shares 64,706,809 * € 30) = € 1,941,204,270. Since TomTom does not have this amount of money (only 400.000.000 in cash),one way to collect this amount is to issue new shares for approx. € 2 billion. The number of new shares (1,600,000,000 / share price € 50 = 32,000,000) will be 121,785,000 + 32,000,000 = 153,785,000. The exact amount needed is as stated € 1,941 million but since this acquisition does included costs the amount needed for further calculations is set at € 2 billion. 3.1.1. Net Income Statement of TomTom after acquisition through issue of shares Net Income Statement 2008 2009 2010 2011 2012 OPERATING INCOME (Revenue) 2,582,369 3,262,107 4,122,492 5,211,890 6,591,693 Net sales 2,582,369 3,262,107 4,122,492 5,211,890 6,591,693 Costs of Sales 1,277,428 1,890,859 2,405,172 3,059,621 3,892,438 GROSS MARGIN 1,304,941 1,371,248 1,717,320 2,152,269 2,699,255 OPERATING EXPENSES (INCL.Costs of Sales) 2,042,556 2,565,749 3,227,010 4,063,169 5,120,944 OPERATING RESULTS 539,813 696,358 895,482 1,148,721 1,470,749 Interest income 35,347 44,306 55,574 69,754 87,609 Exchange rate (losses) (21,330) (27,131) (34,512) (43,905) (55,858) Financial expenses (1,250) (1,592) (2,027) (2,583) (3,290) FINANCIAL RESULTS 12,768 15,583 19,034 23,267 28,462 Balance of participations before taxes 0 0 0 0 0 INCOME BEFORE TAXES 552,581 711,942 914,516 1,171,988 1,499,211 Income taxes 146,149 188,222 241,706 309,690 396,099 INCOME AFTER TAXES 406,431 523,720 672,809 862,297 1,103,113 38
  • 39. 3.1.2. Balance sheet of TomTom after acquisition through issue of shares Impact on the balance sheet • Cash decreases with 400.000 (*1000) • Financial assets increases with 2.000.000 (*1000) • Equity increases with 1.600.000 (*1000) Balance Sheet 2008 2009 2010 2011 2012 Intangible fixed assets 344,965 389,336 449,548 532,417 647,741 Tangible fixed assets 49,432 60,890 75,078 92,664 114,482 Financial fixed assets 2,860,996 2,860,996 2,860,996 2,860,996 2,860,996 FIXED ASSETS 3,255,393 3,311,222 3,385,622 3,486,077 3,623,219 Stocks 167,635 213,443 271,776 346,058 440,652 Receivables 680,337 857,152 1,080,487 1,362,700 1,719,457 Securities 26,695 26,695 26,695 26,695 26,695 Liquid assets 546,882 900,473 1,353,580 1,930,690 2,661,771 CURRENT ASSETS 1,421,549 1,997,763 2,732,539 3,666,143 4,848,575 TOTAL ASSETS 4,676,941 5,308,986 6,118,161 7,152,220 8,471,794 EQUITY 3,882,370 4,406,090 5,078,900 5,941,197 7,044,310 Provisions 53,020 67,536 86,026 109,579 139,580 Other long term liabilities 30,267 36,163 43,237 51,727 61,915 LONG TERM LIABILITIES 83,287 103,699 129,264 161,306 201,494 Trade creditors 210,527 266,905 338,466 429,317 544,677 Other current liabilities 431,533 444,116 459,214 477,333 499,075 Provisions 69,224 88,176 112,317 143,068 182,238 CURRENT LIABILITIES 711,284 799,197 909,998 1,049,718 1,225,990 TOTAL ASSETS 4,676,941 5,308,986 6,118,161 7,152,220 8,471,794 39
  • 40. 3.1.3. Cash Flow of TomTom after acquisition through issue of shares Cash Flow from Operating Acatvities 2008 2009 2010 2011 2012 Net Income 539,813 696,358 895,482 1,148,721 1,470,749 Depreciation 62,304 67,035 72,629 79,296 87,305 Amortisation of intangible assets 21,159 26,952 34,331 43,730 55,702 Change in Provisions 26,275 33,468 42,631 54,303 69,171 Change in non-current liabilities (176,022) (222,624) (281,668) (356,495) (451,351) Change in net working Capital 59,824 74,856 93,735 117,459 147,290 Cash Generated from Operations 533,353 676,045 857,139 1,087,014 1,378,867 Interest received 35,347 44,306 55,574 69,754 87,609 Interest paid (22,580) (28,723) (36,540) (46,487) (59,147) Corporate income taxes paid (146,149) (188,222) (241,706) (309,690) (396,099) Net Cash Flow from Operating actvities 399,971 503,407 634,467 800,591 1,011,230 Investments in associate 2,000,000 Investments in intangible assets 54,433 71,323 94,543 126,599 171,027 Investments in property 71,566 78,493 86,817 96,882 109,123 Cash Flow used in investments 2,125,999 149,816 181,359 223,481 280,150 Free Cash Flow -1,726,028 353,591 453,108 577,110 731,080 Cash flow from financing activities 1,600,000 0 0 0 0 Change in cash (126,028) 353,591 453,108 577,110 731,080 Effect of exchange rates 0 0 0 0 0 Net change in cash (126,028) 353,591 453,108 577,110 731,080 40
  • 41. 3.1.4. Value of TomTom after acquisition of TeleAtlas through issue of shares Common Stock Valuation The free cash flow in 2007 amounts to € 273,971.000 (The acquisition of TeleAtlas have been excluded from the calculation). The growth of the free cash flows is assumed to be the same as before the acquisition, namely 15.7% from 2007 until 2012. In addition, TomTom has 153,785,000 shares outstanding (see paragraph 4.2) and the Required Rate of Return remains 22,82% (€ 273,971.000 / 153,785,000) * 1.157 = € 28.95 (0.2282 – 0.157) 2008 2009 2010 2011 2012 Free Cash Flow 273,971,894 353,590,760 453,107,823 577,109,725 731,080,473 Number of Shares 153,785,000 153,785,000 153,785,000 153,785,000 153,785,000 R 22.82% 22.82% 22.82% 22.82% 22.82% Growth 15.7% 15.7% 15.7% 15.7% 15.7% Share Price 28.95 37.36 47.88 60.98 77.25 Value of TomTom 4,452,043,281 5,745,849,844 7,363,002,117 9,378,033,038 11,880,057,681 NPV of Cash Flows All forecasted cash flows and the Cash Flow for the perpetuities (731,080,473 / 0,2282) are discounted at 22% and therefore worth approximately € 4,400 million. The total assets of TomTom are worth 4.676 million (see balance sheet 2008). Thus, the NPV of TomTom is negative. 2008 2009 2010 2011 2012 PerpetuitiesTotal Free Cash Flow 273.971.894 353.590.760 453.107.823 577.109.725 731.080.473 NPV of FCF 223.067.818 234.402.760 244.564.987 253.619.137 261.589.145 3.203.683.053 4.420.926.900 41
  • 42. 3.2. Acquisition of TeleAtlas through bank loan of TomTom 3.2.1. Net Income Statement of TomTom after acquisition with bank loan As stated above, TomTom has insufficient funds to acquire TeleAtlas. Incurring a bank loan of €1,600,000,000 can be an option for funding. The interest on this bank loan is set at 10% before tax. In the net income statement, the financial expenses will increase with €160,000 (*1000). The taxes paid will decrease with € 48.000 (€160,000 (*1000) * 30%). We made an assumption that the tax rate is 30% Net Income Statement 2008 2009 2010 2011 2012 OPERATING INCOME (Revenue) 2,582,369 3,262,107 4,122,492 5,211,890 6,591,693 Net sales 2,582,369 3,262,107 4,122,492 5,211,890 6,591,693 Costs of Sales 1,277,428 1,890,859 2,405,172 3,059,621 3,892,438 GROSS MARGIN 1,304,941 1,371,248 1,717,320 2,152,269 2,699,255 OPERATING EXPENSES (INCL.Costs of Sales) 2,042,556 2,565,749 3,227,010 4,063,169 5,120,944 OPERATING RESULTS 539,813 696,358 895,482 1,148,721 1,470,749 Interest income 35,347 44,306 55,574 69,754 87,609 Exchange rate (losses) (21,330) (27,131) (34,512) (43,905) (55,858) Financial expenses (161,250) (161,592) (162,027) (162,583) (163,290) FINANCIAL RESULTS (147,232) (144,417) (140,966) (136,733) (131,538) Balance of participations before taxes 0 0 0 0 0 INCOME BEFORE TAXES 392,581 551,942 754,516 1,011,988 1,339,211 Income taxes 98,149 140,222 193,706 261,690 348,099 INCOME AFTER TAXES 294,431 411,720 560,809 750,297 991,113 42
  • 43. 3.2.2. Balance sheet of TomTom after acquisition with bank loan Impact on the balance sheet: • Cash decreases with €400.000 (*1000) in 2008. In addition, because of the net interest payment of € 112.000 (*1000), the generated cash is every year € 112.000 lower than the two company separate. • Financial assets increase with €2.000.000 (*1000). • Long term liabilities increase with €1.600.000 (*1000). • Equity (retained earnings) decreases every year because of the net interest payment of 112.000 (*1000). Balance Sheet 2008 2009 2010 2011 2012 Intangible fixed assets 344,965 389,336 449,548 532,417 647,741 Tangible fixed assets 49,432 60,890 75,078 92,664 114,482 Financial fixed assets 2,860,996 2,860,996 2,860,996 2,860,996 2,860,996 FIXED ASSETS 3,255,393 3,311,222 3,385,622 3,486,077 3,623,219 Stocks 167,635 213,443 271,776 346,058 440,652 Receivables 680,337 857,152 1,080,487 1,362,700 1,719,457 Securities 26,695 26,695 26,695 26,695 26,695 Liquid assets 434,882 676,473 1,017,580 1,482,690 2,101,771 CURRENT ASSETS 1,309,549 1,773,763 2,396,539 3,218,143 4,288,575 TOTAL ASSETS 4,564,941 5,084,986 5,782,161 6,704,220 7,911,794 EQUITY 2,170,370 2,582,090 3,142,900 3,893,197 4,884,310 Provisions 53,020 67,536 86,026 109,579 139,580 Other long term liabilities 1,630,267 1,636,163 1,643,237 1,651,727 1,661,915 LONG TERM LIABILITIES 1,683,287 1,703,699 1,729,264 1,761,306 1,801,494 Trade creditors 210,527 266,905 338,466 429,317 544,677 Other current liabilities 431,533 444,116 459,214 477,333 499,075 Provisions 69,224 88,176 112,317 143,068 182,238 CURRENT LIABILITIES 711,284 799,197 909,998 1,049,718 1,225,990 TOTAL ASSETS 4,564,941 5,084,986 5,782,161 6,704,220 7,911,794 43
  • 44. 3.2.3. Cash Flow of TomTom after acquisition with bank loan The interest payment of € 160.000 per year increases the paid interest every year, which in its turn makes the taxes paid decrease every year (160.000 *0.30) and has therefore a negative impact on the free cash flow of € 112.000 per year. Cash Flow from Operating 2008 2009 2010 2011 2012 Net Income 539,813 696,358 895,482 1,148,721 1,470,749 Depreciation 62,304 67,035 72,629 79,296 87,305 Amortisation of intangible assets 21,159 26,952 34,331 43,730 55,702 Change in Provisions 26,275 33,468 42,631 54,303 69,171 Change in non-current liabilities (176,022) (222,624) (281,668) (356,495) (451,351) Change in net working Capital 59,824 74,856 93,735 117,459 147,290 Cash Generated from Operations 533,353 676,045 857,139 1,087,014 1,378,867 Interest received 35,347 44,306 55,574 69,754 87,609 Interest paid (182,580) (188,723) (196,540) (206,487) (219,147) Corporate income taxes paid (98,149) (140,222) (193,706) (261,690) (348,099) Net Cash Flow from Operating actvities 287,971 391,407 522,467 688,591 899,230 Investments in associate 2,000,000 Investments in intangible assets 54,433 71,323 94,543 126,599 171,027 Investments in property 71,566 78,493 86,817 96,882 109,123 Cash Flow used in investments 2,125,999 149,816 181,359 223,481 280,150 Free Cash Flow (1,838,028) 241,591 341,108 465,110 619,080 Cash flow from financing activities 1,600,000 0 0 0 0 Change in cash (238,028) 241,591 341,108 465,110 619,080 Effect of exchange rates 0 0 0 0 0 Net change in cash (238,028) 241,591 341,108 465,110 619,080 44
  • 45. 3.2.3. Value of TomTom after acquisition of TeleAtlas with bank loan Common Stock Valuation The free cash flow in 2008 amounts to € 161,971,894 (The acquisition of TeleAtlas has not been included in the calculation). The growth of the free cash flows is assumed to be the same as before the acquisition, namely 15.7% from 2007 until 2012. In addition, TomTom has 153,785,000 shares outstanding (see paragraph 4.2) and the Required Rate of Return remains 22,82% (€ 161,971,894 / 121,785,000) * 1.157 = € 21.61 (0.2282 – 0.157) 2008 2009 2010 2011 2012 Free Cash Flow 161,971,894 241,590,760 341,107,823 465,109,725 619,080,473 Number of Shares 121,785,000 121,785,000 121,785,000 121,785,000 121,785,000 R 22.82% 22.82% 22.82% 22.82% 22.82% Growth 15.7% 15.7% 15.7% 15.7% 15.7% Share Price 21.61 32.24 45.51 62.06 82.61 Value of TomTom 2,632,043,281 3,925,849,844 5,543,002,117 7,558,033,038 10,060,057,681 NPV of Cash Flows All forecasted cash flows and the Cash Flow for the perpetuities (€ 619,080,473 / 0,2282) are discounted at 22,82% and thus worth approximately € 4,201 Million. The total assets of TomTom are worth € 4,564 million (see balance sheet 2008). Thus, the NPV of TomTom is negative. 2008 2009 2010 2011 2012 Perpetuities Total Free Cash Flow 161.971.894 241.590.760 341.107.823 465.109.725 619.080.473 NPV of FCF 131.877.458 196.703.110 277.729.867 378.692.172 504.055.099 2.712.885.507 4.201.943.213 45
  • 46. 4. Stock Exchange by Rappaport 4.1. No Synergies / Extra shares TomTom buys TeleAtlas for € 30 per share in cash. In 2007 TomTom has already bought 29,9% of the shares (total 92,306,432) so for the remaining 70% shares TomTom will have to pay € 1,938,435,072. Since TomTom does not have this amount of money (only € 400.000.000 in cash), new shares must be issued for approx. € 1.6 billion. The new number of shares (1,600,000,000 / share price 50 = 32,000,000) will be 153,785,000. Shares 2007 2008 2009 2010 2011 2012 TomTom Net Income 317.242.000 403.387.664 513.828.716 654.506.752 833.700.171 1.061.953.865 Number of Shares 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 Earnings per share 2,60 3,31 4,22 5,37 6,85 8,72 Stock Exchange Value 52 66 84 107 137 174 Price Earnings 20 20 20 20 20 20 Shareholders Value 6.344.840.000 8.067.753.270 10.276.574.320 13.090.135.037 16.674.003.414 21.239.077.294 TeleAtlas Net Income 24.365.000 3.043.457 9.891.271 18.302.668 28.597.268 41.158.916 Number of Shares 92.306.432 92.306.432 92.306.432 92.306.432 92.306.432 92.306.432 Earnings per share 0,26 0,03 0,11 0,20 0,31 0,45 Stock Exchange Value 17 2 7 12 19 28 Price Earnings 63 62 62 62 62 62 Shareholders Value 1.529.940.862 188.694.342 613.258.783 1.134.765.430 1.773.030.604 2.551.852.788 TakeOver Net Income 341.607.000 406.431.121 523.719.987 672.809.420 862.297.439 1.103.112.781 Number of Shares 153.785.000 153.785.000 153.785.000 153.785.000 153.785.000 153.785.000 Earnings per share 2,22 2,64 3,41 4,38 5,61 7,17 Stock Exchange Value 44 52 67 86 111 142 Price Earnings 19,77017 19,77017 19,77017 19,77017 19,77017 19,77017 Shareholders Value 6.753.627.633 8.035.211.361 10.354.031.896 13.301.554.977 17.047.764.854 21.808.724.521 Difference (1.121.153.229) (221.236.252) (535.801.207) (923.345.490) (1.399.269.164) (1.982.205.561) The decrease in value for the shareholders is caused by the fact that the earnings per share decrease. The only way to prevent this decrease in share holders value if TomTom can convince the market of the strategic profit of this acquisition and the market acknowledge this by a higher price earnings and thus a share price. 46
  • 47. 4.2. Synergies / Extra shares TomTom buys TeleAtlas for € 30 per share in cash. In 2007 TomTom has already bought 29,9% of the shares (total 92,306,432) so for the remaining 70% shares TomTom will have to pay € 1,938,435,072. Since TomTom does not have this amount of money (only 400.000.000 in cash), new shares must be issued for approx. € 1.6 billion. The new number of shares (1,600,000,000 / share price 50 = 32,000,000) will be 153,785,000. The net synergy amounts to € 90.000.000 per year. Currently (2007) both companies have together € 625 million on Operating Expenses. A synergy of €90 million amounts to a saving of almost 15% for the companies together. Shares 2007 2008 2009 2010 2011 2012 TomTom Net Income 317.242.000 403.387.664 513.828.716 654.506.752 833.700.171 1.061.953.865 Number of Shares 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 Earnings per share 2,60 3,31 4,22 5,37 6,85 8,72 Stock Exchange Value 52 66 84 107 137 174 Price Earnings 20 20 20 20 20 20 Shareholders Value 6.344.840.000 8.067.753.270 10.276.574.320 13.090.135.037 16.674.003.414 21.239.077.294 TeleAtlas Net Income 24.365.000 3.043.457 9.891.271 18.302.668 28.597.268 41.158.916 Number of Shares 92.306.432 92.306.432 92.306.432 92.306.432 92.306.432 92.306.432 Earnings per share 0,26 0,03 0,11 0,20 0,31 0,45 Stock Exchange Value 17 2 7 12 19 28 Price Earnings 63 62 62 62 62 62 Shareholders Value 1.529.940.862 188.694.342 613.258.783 1.134.765.430 1.773.030.604 2.551.852.788 TakeOver Net Income 431.607.000 496.431.121 613.719.987 762.809.420 952.297.439 1.193.112.781 Number of Shares 153.785.000 153.785.000 153.785.000 153.785.000 153.785.000 153.785.000 Earnings per share 2,81 3,23 3,99 4,96 6,19 7,76 Stock Exchange Value 55 64 79 98 122 153 Price Earnings 19,77017 19,77017 19,77017 19,77017 19,77017 19,77017 Shareholders Value 8.532.942.714 9.814.526.442 12.133.346.978 15.080.870.059 18.827.079.935 23.588.039.602 Difference 658.161.852 1.558.078.829 1.243.513.874 855.969.592 380.045.917 (202.890.480) 47
  • 48. 4.3. No Synergies / Bank loan TeleAtlas is being bought with a bank loan (10%) of € 1,600.000.000. The net profit of the two companies decreases with 70% * € 160,000,000 per year because of the interest payment. Bank Loan 2007 2008 2009 2010 2011 2012 TomTom Net Income 317.242.000 403.387.664 513.828.716 654.506.752 833.700.171 1.061.953.865 Number of Shares 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 Earnings per share 2,60 3,31 4,22 5,37 6,85 8,72 Stock Exchange Value 52 66 84 107 137 174 Price Earnings 20 20 20 20 20 20 Shareholders Value 6.344.840.000 8.067.753.270 10.276.574.320 13.090.135.037 16.674.003.414 21.239.077.294 TeleAtlas Net Income 24.365.000 3.043.457 9.891.271 18.302.668 28.597.268 41.158.916 Number of Shares 92.306.432 92.306.432 92.306.432 92.306.432 92.306.432 92.306.432 Earnings per share 0,26 0,03 0,11 0,20 0,31 0,45 Stock Exchange Value 17 2 7 12 19 28 Price Earnings 63 62 62 62 62 62 Shareholders Value 1.529.940.862 188.694.342 613.258.783 1.134.765.430 1.773.030.604 2.551.852.788 TakeOver Net Income 229.607.000 294.431.121 411.719.987 560.809.420 750.297.439 991.112.781 Number of Shares 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 121.785.000 Earnings per share 1,89 2,42 3,38 4,60 6,16 8,14 Stock Exchange Value 37 48 67 91 122 161 Price Earnings 19,77017 19,77017 19,77017 19,77017 19,77017 19,77017 Shareholders Value 4.539.368.865 5.820.952.593 8.139.773.129 11.087.296.210 14.833.506.086 19.594.465.753 Difference (3.335.411.997) (2.435.495.020) (2.750.059.975) (3.137.604.257) (3.613.527.932) (4.196.464.329) Because of the interest the Net Income decreases with €160,000,000 * 0,70 = €112,000,000 per year. The EPS drops with 0.91965 (€ 112.000.000 / 121,785,000). When this number is multiplied with the PE ratio, the stock value decreases with € 18.18 (* 121,785,000 shares) which amounts to € 2.214,231,603. The Net Income of TeleAtlas increases the EPS with 0.201880. So the total decrease of EPS from 2.6 to 1.89 is a decrease of 0.91 (Net Interest Payment) and a increase of 0.20 (TeleAtlas) 48
  • 49. 5. Advise TomTom produces portable navigation devices (PND’s) primarily for automotive use. TeleAtlas is one of the two providers of navigable digital maps offering complete coverage of Europe and North America. Navigable digital maps are essential inputs for PND’s. One of the primary catalysts for the deal was the development by TomTom of a software innovation branded as ‘TomTom Map Share’. This development solves one of the most common customer complaints that maps are out of sync with reality. The development enables drivers to instantly correct map errors directly on their PND. Equally importantly, TomTom created the software, interfaces and tools necessary to create a community. The maps improvements made by users can be shared amongst TomTom PND’s. No other device manufacturer has achieved this. Currently TeleAtlas map creation, enrichment and maintenance process is relatively lengthy and expensive. It takes at least several months before a new map version with corrected data can be released. After the takeover TomTom should be able to ‘make better maps faster’. Currently, TomTom is 40% of TeleAtlas’s revenue (€ 300 million in 2007 makes € 120 million). The rate for database license of the maps in the PND’s from either TeleAtlas or Navteq is in the $ 20-$25 range. This makes the data more expensive than the GPS chip, processors, screens, keyboard etc except for the software. Financing of the acquisition For the takeover of TeleAtlas, TomTom needs € 1.6 billion which can be supplied by banks (Goldman Sachs, Rabobank and Abn Amro Bank) at a debt ratio of 3.5 EBITA which is € 450 million in 2007. Perspective The prices per share (30) is 81% above the prior price before offering. TomTom pays appr. 115 times the earnings per share. No synergies have been reported prior to the offering. TomTom pays half its own value (6mio) to buy a company which has only 10% of TomTom’s net income. Advise The takeover of TeleAtlas by TomTom is not a good investment. But TomTom says it quite clear in their annual report. TomTom believes that the navigation industry will change significantly in the next few years. And since the core ingredient of TomTom is TeleAtlas it maps TomTom wanted to secure their most important ingredient. Basically TomTom wants to move up the vertical line by buying TeleAtlas. The combined company will improve all aspects of the digital map maintenance, enrichment and creation process. This will result in better maps produced more efficiently and updated more frequently for the benefits of all current and future customers. The acquisition of TeleAtlas was a pure strategic acquisition. 49
  • 50. 6. What happened? The acquisition of TeleAtlas was not a done-deal. July 23, 2007 TomTom announced a public offering for all outstanding shares of TeleAtlas of 21.25 in cash per share. October 31, 2007 TeleAtlas receives an unsolicited proposal from Garmin to communicate its intention to make a public offering for all of the outstanding shares for € 24.50 per share in cash. Garmin had the best cards in its hands. The company had twice the stock market value, a higher cash flow and equity that is 75% higher than TomTom. Three scenarios could have happened. 1. Garmin withdraws from the deal and TomTom buys TeleAtlas for a nice price of 21.25 per share. 2. TomTom raises the price of the offer and makes Garmin pay the bonus price for the takeover. TomTom would have gotten a nice profit for it; 29% of shares in TeleAtlas. 3. TomTom buys TeleAtlas at a higher price. The latter happened and Garmin made TomTom pay € 800.000.000 more than TomTom intended in the beginning of 2007. On November 7, 2007 TomTom announced that I had terminated its previous offer and it intended to make a new cash offer of € 30 in cash per share. The intended offer would be an all-cash offer for all of the issued and outstanding share capital of Tele Atlas. Based on the offer price, the intended offer valued the fully diluted outstanding share capital of Tele Atlas at approximately €2.9 billion. The offer represented a premium of 81% to the last closing price of 20 July 2007 (the day prior to the announcement of the previous offer), 41% more than the previous offer and 22% more than the offer made by Garmin Ltd. The aggregate value of the proposed transaction is approximately €2.9 billion, including the net financial cash position of Tele Atlas. This implies a multiple of approximately 41 times the projected 2007 adjusted EBITDA for Tele Atlas. Goldman Sachs International, ABN AMRO Bank N.V. and Rabobank are providing committed financing for the acquisition at a debtratio of 3.5 EBITA which is € 450 million in 2007. During the summer of 2007 the credit crises stared. It’s size and impact became clear in the beginning of 2008. The crises made the market nervous about the level of sales of TomTom. This made the stock price to decrease. Furthermore a decrease in sales might put pressure on the lending ratio of 3 times EBITA. If TomTom could not borrow a loan it might need to issue more shares. Even more shares than in initially thought because of the lower stock price. The threat of issuing shares forced the stock price to decrease even more. 50
  • 51. Whether or not the acquisition of TeleAtlas was a wise move of TomTom will show in the future. Can TomTom gain competitors advantage of the electronic map maker or not? And how will the PND market develop? It’s clear that the easy profit times for TomTom are in the history the company has to search for new products or markets to maintain its position. So it probably can be suspected that investors will pay again 20 price earnings. 51