Exam 15: Business Alliances: Joint Ventures, partnerships, strategic Alliances, and Licensing

Coca-Cola and Procter & Gamble's Aborted Effort to Create a Global Joint Venture Company Coca-Cola (Coke), arguably the world's best-known brand, manufactures and distributes Coca-Cola as well as 230 other products in 200 countries through the world's largest distribution system. Procter & Gamble (P&G) sells 300 brands to nearly 5 billion consumers in 140 countries and holds more food patents than the three largest U.S. food companies combined. Moreover, P&G has a substantial number of new food and beverage products under development. Both firms have been competing in the health and wellness segment of the food market for years. P&G spends about 5 percent of its annual sales, about $1.9 billion, on R&D and holds more than 27,000 patents. The firm employs about 6,000 scientists, including about 1,200 people with PhDs. Both firms have extensive distribution systems. P&G uses a centralized selling and warehouse distribution system for servicing high-volume outlets, such as grocery store chains. With a warehouse distribution system, the retailer is responsible for in-store presentations of the brands, including shelving, display, and merchandising. The primary disadvantage of this type of distribution system is that it does not reach many smaller outlets cost effectively, resulting in many lost opportunities. In contrast, Coke uses three distinct systems. Direct store delivery consists of a network of independently operated bottlers, which bottle and deliver the product directly to the outlet. The bottler also is responsible for in-store merchandising. Coke's warehouse distribution is similar to P&G's and is used primarily to distribute Minute Maid products. Coke also sells beverage concentrates to distributors and food service outlets. On February 21, 2001, Coca-Cola and Procter & Gamble announced, amid great fanfare, plans to create a stand-alone joint venture corporation focused on developing and marketing new juice and juice-based beverages as well as snacks on a global basis. The new company expected to benefit from Coca-Cola's worldwide distribution, merchandising, and customer marketing skills and P&G's R&D capabilities and wide range of popular brands. The new company would focus on the health and wellness segment of the food market. Less than nine months later, Coke and P&G released a one-sentence joint statement on September 21, 2001, that they could achieve better returns for their respective shareholders if they pursued this opportunity independently. Although it is unclear what may have derailed what initially had seemed to the potential partners like such a good idea, it is instructive to examine the initial rationale for the proposed joint effort. Each parent would own 50 percent of the new company. Because of the businesses each partner was to contribute to the JV, the firm would have annual sales of $4 billion. The new firm would be an LLC, having its own board of directors consisting of two directors each from Coke and P&G. Moreover, the new firm would have its own management and dedicated staff providing administrative and R&D services. Coke was contributing a number of well-known brands including Minute Maid, Hi-C, Five Alive, Cappy, Kapo, Sonfil, and Qoo; P&G contributed Pringles, Sunny Delight, and Punica beverages. The new company would have had 15 manufacturing facilities and about 6,000 employees. Although the new firm was to have access to all distribution systems of the parents, it would have been free to choose the best route to market for each product. Although Minute Maid was to continue to use Coke's distribution channels, it also was to take advantage of existing refrigerated distribution systems built for Sunny Delight. Pringles was to use a variety of distribution systems, including the existing warehouse system. The Pringles brand was expected to take full advantage of Coke's global distribution and merchandising capabilities. Minute Maid was to gain access to new outlets through Coke's fountain and direct store distribution system. The new company's sales were expected to grow from $4 billion during the first 12 months of operation to more than $5 billion within two years. The combination of increasing revenue and cost savings was expected to contribute about $200 million in pretax earnings annually by 2005. Specifically, Pringles's revenue growth as a result of enhanced distribution was expected to contribute about $120 million of this projected improvement in pretax earnings. The importance of improved distribution is illustrated by noting that Coke has access to 16 million outlets globally. In the United States alone, that represents a 10-fold increase for Pringles, from its current 150,000 points of outlet. Similarly, improved merchandising and distribution of Sunny Delight was expected to contribute an additional $30 million in pretax income. The remaining $50 million in pretax earnings was to come from lower manufacturing, distribution, and administrative expenses and through discounts received on bulk purchases of foodstuffs and ingredients. P&G and Coke were hoping to stimulate innovation by combining global brands and distribution with talent from both firms in what was hoped would be a highly entrepreneurial corporate culture. The parents also hoped that the stand-alone firm would be able to achieve focus and economies of scale that could not have been achieved by either firm separately. The results of the LLC were not to be consolidated with those of the parents but rather shown using the equity method of accounting. Under this method of accounting, each parent's proportionate share of earnings (or losses) is shown on its income statement, and its equity interest in the LLC is displayed on its balance sheets. The new company was expected to be nondilutive of the earnings of the parents during its first full year of operations and contribute to earnings per share in subsequent years. The incremental earnings were expected to improve the market value of the parents by at least $1.5-2.0 billion (Bachman, 2001). Some observers suggested that P&G would stand to benefit the most from the JV. It would have gained substantially by obtaining access to the growing vending machine market. Historically, P&G's penetration in this market had been miniscule. This perceived disproportionate benefit accruing to P&G may have contributed to the eventual demise of the joint venture effort. Coke may have sought additional benefits from the JV that P&G was simply not willing to cede. Once again, we see that, no matter how attractive the concept may seem to be on the surface, the devil is indeed in the details when comes to making it happen. : -What factors may have contributed to the decision to discontinue efforts to implement the joint venture? Consider control,scope,financial,and resource contribution issues.

Bridgestone Acquires Firestone's Tire Assets Bridgestone Tire, a Japanese company, lacking a source of retail distribution in the United States, approached its competitor, Firestone, to create a JV whose formation involved two stages. In the first stage, Firestone, which consisted of a tire manufacturing and distribution division and a diversified rubber products division, agreed to transfer its tire manufacturing operations into a subsidiary. This subsidiary was owned and operated by Firestone's worldwide tire business. In the second stage, Firestone sold three-fourths of its equity in the tire subsidiary to Bridgestone, making the subsidiary a JV corporation. Firestone received $1.25 billion in cash, $750 million from Bridgestone, and $500 million from the JV. Firestone also retained 100% ownership in the diversified products division and 25% of the tire JV corporation. For its investment, Bridgestone acquired a 75% ownership interest in a worldwide tire manufacturing and distribution system. Case Study -Why do you believe Bridgestone chose to invest in Firestone rather than pursue another option?

Project-oriented JVs often are viewed unfavorably by regulators.

Because the limited liability company offers its owners the significant advantage of greater flexibility in allocating profits and losses and because the LLC is not subject to the many restrictions of the S-Corporation,the popularity of the S-corporation has increased.

Conoco Phillips Buys a Stake in Russian Oil Giant Lukoil In late 2004, Conoco Phillips (Conoco) announced the purchase of 7.6 percent of Lukoil's (a largely government owned Russian oil and gas company) stock for $2.36 billion during a government auction of Lukoil's stock. The deal gives Conoco access to Russia's huge, but largely undeveloped, oil and natural gas reserves. Conoco intends to boost its investment to 10 percent by yearend and to 20 percent within two-to-three years. To help ensure that Conoco's interests are protected, even though it has only a minority position, Conoco will have one seat on Lukoil's board and Lukoil changed its corporate charter to require unanimous board approval for the most important decisions such as payment of dividends and major new investments. Conoco will gain one additional seat once its ownership share climbs to 20 percent. Conoco has also agreed to pay $370 million to Lukoil for a 30 percent stake in a joint venture to develop reserves in northern Russia. The two firms will split operational responsibilities equally. Conoco's stock fell more than 1 percent immediately following the announcement. : -Do you believe that Conoco gained an effective say in Lukoil's operations following its investment? Explain your answer.

Equity partnerships commonly are used in purchaser-supplier relationships,technology development,marketing alliances,and in situations in which a larger firm makes an investment in a smaller firm to ensure its continued financial viability.This is important because it ensures one partner has dominant control over the partnership.

British Petroleum and Russia's Rosneft Swap Shares Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP. Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world. The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement. The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds. At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion. The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008. Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%. Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement. On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV. : -Speculate as to the purpose of the share swap between BP and Resnoft.

British Petroleum and Russia's Rosneft Swap Shares Extending its already close ties with Russia, British Petroleum PLC announced an agreement to exchange shares with Russia's largest oil company, OAO Rosneft, on January 14, 2011. Rosneft is 75% owned by the Russian government. BP and Rosneft also announced the formation of a JV to develop three massive offshore exploration blocks that Rosneft owns in northern Russia. The two firms said they will jointly explore three areas in the South Kara Sea in the Russian Arctic, spending between $1.4 and $2 billion on seismic tests and drilling wells in the initial exploration phase. The JV will be two-thirds owned by Rosneft, with the remainder owned by BP. Reflecting Europe's escalating dependence on Russia for an increasing share of its energy usage, particularly for clean-burning natural gas, the agreement is backed by Britain's prime minister, David Cameron, and Russia's prime minister, Vladimir Putin. Russia holds one-fifth of the world's proven reserves of natural gas, and, by some estimates, the South Kara Sea contains some of the largest reserves of oil and gas in the world. The deal comes in the wake of BP's sale of assets to raise funds to cover the costs of the Gulf of Mexico oil spill in mid-2010. Such costs are expected to eventually total $40 billion. Rosneft, which had announced in late 2010 that it was seeking a partner for exploiting its Arctic leases, indicated that BP's experience in dealing with such problems gives it an edge over other potential partners. Rosneft also regards BP's deep-water drilling technology and experience as cutting edge. BP's expertise received another vote of confidence when Australia granted BP licenses to initiate extensive drilling activity off its coast several days after the Rosneft announcement. The share exchange gives Rosneft a 5% interest in BP's voting shares, making it BP's single largest shareholder. In return, BP receives a 9.5% ownership stake in Rosneft. Each stake is valued at about $7.8 billion. Both firms agreed to hold each other's equity for at least two years before selling any stock. BP's shares currently pay a dividend about twice that of Rosneft's. BP and Rosneft have stated publicly that they believe investors have significantly undervalued their firms. The Russian government has a particularly strong interest in seeing the value of its holdings appreciate, since it announced plans to privatize a number of largely state-owned enterprises, including Rosneft, in 2014 in order to raise funds. At the time of the announcement, BP's market capitalization was about $154 billion. With almost 90% of its shares owned by the Russian government and Sherbank, Russia's biggest retail savings bank, the firm's stock trading in public markets tends to be limited and not reflective of Rosneft's true value. However, the terms of the share exchange imply a market capitalization for Rosneft of about $81 billion. The transaction represents the first time there has been a cross-shareholding between major international oil firms and a major government-owned national oil company. Unlike more conventional oil and gas JVs, the Rosneft JV will not own the oil leases but merely the right to develop them. This structure is similar to Russian oil company Gazrpom's agreement with France's Total SA and Norway's Statoil for the development of the Shtokman gas field in early 2008. Rosneft became Russia's leading extraction and refining company after purchasing assets of former privately owned oil giant Yukos at state-sponsored auctions, in which the global community decried what appeared to be the Russian government expropriation of the privately owned assets. In 2006, Rosneft conducted one of the largest IPOs in history by issuing nearly 15% of its shares on the Russian Trading System and the London Stock Exchange. With the shares priced at $7.55 each, the offering raised about $10.7 billion. Most of the proceeds went to the Russian government. BP began its relationship with Rosneft by buying $1 billion in shares in the firm's initial public offering, equivalent to 1.3%. Thus, the recent agreement brings BP's ownership interest in Rosneft to 10.8%. Previous attempts to invest in Russia and to create partnerships between Russian state oil companies and Western oil firms have failed due to outright expropriation by the Russian government or heavy-handed tactics employed by certain Russian billionaires (so-called oligarchs) with close ties to the Russian government. For example, Russian officials forced Shell Oil to sell control of its Sakhalin II oil and gas development to state-owned Gazprom. BP and Gazprom signed a global joint venture in 2007 in which each was to contribute assets valued at $1.5 billion, but it was later dissolved due to disagreements between BP and large Russian investors. TNK-BP, BP's 50 percent-owned JV with a group of Russian billionaire business people, has also had a troubled history. The JV that contributes a quarter of BP's global production and nearly a fifth of its reserves was rocked by a shareholder dispute in 2008 that cost BP some of its control. BP chief executive Bob Dudley had served as chief executive of that JV for five years until he was expelled by BP's Russian partners during the disagreement. On news of the agreement, BP's partners in the TNK-BP JV stated that BP had not notified them adequately and that the Rosneft deal violated their "right of first refusal" as stated in the JV agreement. The partners were successful in getting a court injunction in the United Kingdom to block the implementation of the JV in February 2011. TNK-BP at the time of this writing is considering a legal claim against BP for damages of up to $10 billion for allegedly reneging on its commitment to use TNK-BP as its main vehicle for investment in Russia. These developments raise serious questions about the longer-term viability of the BP-Rosneft JV. : -How would you estimate the market capitalization for Rosneft based on the terms of the share exchange? Show your work.

Who receives rights to distribute,manufacture,acquire or license technology,or purchase future products or technology is an issue usually resolved in defining the scope of the alliance.

Pixar and Disney Part Company The announcement on February 5, 2004, of the end of the wildly successful partnership between Walt Disney Company ("Disney") and Pixar Animation Studios ("Pixar") rocked the investment and entertainment world. While the partnership continued until the end of 2005, the split-up underscores the nature of the rifts that can develop in business alliances of all types. The dissolution of the partnership ends a relationship in existence since 1995 in which Disney produced and distributed the highly popular films created by Pixar. Under the terms of the original partnership agreement, the two firms cofinanced each film and split the profits evenly. Moreover, Disney received 12.5 percent of film revenues for distributing the films. Negotiations to renew the partnership after 2005 foundered on Pixar's desire to get a greater share of the partnership's profits. Disney CEO Michael Eisner refused to accept a significant reduction in distribution fees and film royalties; while Steve Jobs, Pixar's CEO, criticized Disney's creative capabilities and noted that marketing alone does not make a poor film successful. After 10 months of talks between Disney and Pixar, Disney rejected a deal that would have required it to earn substantially less from future Pixar releases. Disney also would have had to relinquish potentially lucrative copyrights to existing films such as Toy Story and Finding Nemo. Disney shares immediately fell by almost 2 percent on the news of the announcement, while Pixar's shares skyrocketed almost 4 percent by the end of the day. Pixar contributed more than 50 percent of Disney Studio's operating profits, and Disney Studios accounted for about one fourth of Disney's total operating profits. While Disney now faces Pixar as a competitor, it retains the rights to make video and theatrical sequels and TV shows to the movies covered by the current partnership agreement. However, while Disney does retain the right to make sequels to Pixar films, it does not own the underlying technology and must recreate the millions of lines of computer code for each character. The key challenge for Disney will be to fill the creative vacuum left by the loss of Pixar writers and animators. Disney is particularly vulnerable in that it has severely cut back its own feature animation department and stumbled in recent years with a variety of box office duds (e.g., Treasure Planet). Reflecting concern that Disney would not be able to compete with Pixar, bond-rating service, Fitch Ratings suggested a possible downgrade of Disney debt. Pixar announced that it was seeking another production studio. Immediately following this announcement, Sony and others approached Pixar with proposals to collaborate in making animated films. Epilogue In early 2006, Pixar agreed to be acquired by Disney. : -What does the reaction of the stock market and credit rating agencies tell you about how investors value the contribution of the two partners to the partnership? Do you think investors may have over-reacted?

GENERAL MOTORS BUYS 20% OF SUBARU In late 1999, General Motors (GM), the world's largest auto manufacturer, agreed to purchase 20% of Japan's Fuji Heavy Industries, Ltd., the manufacturer of Subaru vehicles, for $1.4 billion. GM's objective is to accelerate GM's push into Asia. The investment gives GM an interest in an auto manufacturer known for four-wheel drive vehicles. In combination with its current holdings, GM now has a position in every segment of Japan's auto market, including minivans, small and midsize cars, and trucks. GM already owns 10% of Suzuki Motor Corporation and 49% of Isuzu Motors Ltd. GM can now expand in Asia more quickly and at a lower cost than if it developed products independently. GM has been collaborating with Fuji on various products since 1995. The move underscores GM's commitment to expanding its current modest position in the Asian market, which is expected to be the fastest growing market during the next decade. GM has sold less than 500,000 in the Asia-Pacific region in 1999, including about 60,000 in Japan. In 2002, GM bought the remaining outstanding stock of Subaru. : -What other motives may General Motors have had in making this investment?

Failure to define scope adequately can result in situations in which the alliance may be competing with the products or services offered by the parent firms.

Termination provisions in the alliance agreement should not include buyout provisions enabling one party to purchase another's ownership interests.

Poorly defined roles and responsibilities are an important factor contributing to the failure of many alliances to achieve their objectives.

Business alliances may represent attractive alternatives to mergers and acquisitions.

Alliance agreements must be flexible enough to be revised when necessary and contain mechanisms for breaking deadlocks,transferring ownership interests,and dealing with the potential for termination.

The choice of legal structure should be made before the parties to the business alliance are comfortable with the venture's objectives,potential synergy,and preliminary financial analysis of projected returns and risk.

In general,business alliances are not intended to become permanent arrangements.All of the following are common reasons for terminating such arrangements except for

JVs established as partnerships typically raise capital through increased contributions from existing partners or through the issuance of limited partnership interests to investors,with the sponsoring firms becoming the general partners.

Microsoft Partners with Yahoo!-An Alternative to Takeover? Business alliances sometimes represent a less expensive alternative to mergers and acquisitions. This notion may have motivated Microsoft when the firm first approached Yahoo! about a potential partnership in November 2006 and again in mid-2007. Frustrated with their inability to partner with Yahoo!, Microsoft initiated a hostile takeover bid in 2008 valued at almost $48 billion or $33 per share, only to be spurned by Yahoo!. Following the withdrawal of Microsoft's offer, Yahoo!'s share price fell into the low to mid-teens and remained in that range throughout 2010. Reflecting the slumping share price and a failed effort to create a search partnership with Google, Yahoo!'s cofounder, Jerry Yang, was replaced by Carol Bartz in early 2009. The U.S. Justice Department had threatened to sue to block the proposed partnership between Yahoo! and Google on antitrust grounds. Microsoft again approached Yahoo! with a partnering proposal in mid-2009, which resulted in an announcement on February 18, 2010, of an Internet search agreement between the two firms. As a result of the agreement, Yahoo! transferred control of its Internet search technology to Microsoft. Microsoft is relying on a ten-year arrangement with Yahoo! to help counter the dominance of Google in the Internet search market. By gaining access to each other's Internet users, both firms hope to be able to attract more advertising dollars from companies willing to pay for links on Microsoft's and Yahoo!'s websites. With Microsoft's search technology believed to be superior to Yahoo!'s, users requesting searches through Yahoo!'s site will be implemented using Microsoft's search software. Regulatory agencies in both the United States and the European Union had no trouble approving the proposal because the combined Yahoo! and Microsoft Internet search market share is dwarfed by Google's. Google is estimated to have about two-thirds of the search market, followed by Yahoo! at 7% and Microsoft with about 3%. Yahoo! could profit handsomely from the deal, since it will retain 88% of the revenue from search ads on its website during the first five years of the ten-year contract. Microsoft will pay for most of the costs of implementing the partnership by giving Yahoo! $150 million to defray its expenses. Microsoft also agreed to absorb about 400 of Yahoo!'s nearly 14,000 employees. Ironically, Microsoft may get much of what it wanted (namely Yahoo!'s user base) at a fraction of the cost it would have paid to acquire the entire company. Garmin Utilizes Supply Agreement as Alternative to Acquiring Tele Atlas Following an aggressive bidding process, Garmin Ltd., the largest U.S. maker of car-navigation devices, withdrew its bid for the Netherlands-based Tele Atlas NV on November 16, 2007. Tele Atlas provides maps of 12 million miles of roads in 200 countries. The move cleared the way for TomTom NV to buy the mapmaker for $4.25 billion. Both Garmin and TomTom are leading manufacturers of global positioning systems (GPSs), which enable users to navigate more easily through unfamiliar territory. The most critical component of such navigation systems is the map. In lieu of acquiring Tele Atlas, Garmin entered into a six-year deal with an option to extend for an additional four years to obtain maps from Tele Atlas's competitor Navteq Corp. In doing so, Garmin avoided the EPS-dilutive effects of owning money-losing Tele Atlas. Garmin can focus on building traffic information and business listings into its products without having to own the underlying maps. An acquisition would have diluted Garmin's profit until 2010. Building maps comparable to those owned by Tele Atlas could take up to 10 years and cost $1 billion. By owning the maps, TomTom is seeking to become more of a service provider than simply a manufacturer of GPS devices. Such devices are widely used in the automotive industry, as well as aviation and boating. The biggest growth opportunity is the increased use of GPS tracking capabilities in the market for mobile phones. This application is expected to dwarf the transportation and sports markets for GPS devices. Because it will own the underlying maps, TomTom may be able to more easily combine the data with navigation devices and add traffic, gas station, and restaurant information. In contrast, Garmin will have to obtain proprietary data from others. Garmin may also have to pay more for maps or even lose access after the contract (including the option to extend) expires. : -Describe the advantages of the supply agreement to Garmin compared to outright acquisition of Tele Atlas?