April 2005. Klaas van der Mullen was a bit dumbfounded. He had always put a lot of trust in the investment banks’ opinions about the technology companies in which he was interested in investing. However, this time, the analyst’s report was anything but useful. In essence, the author of the report practically acknowledged that he had no clue what the company was really worth – not a very comforting thought. From his ninth floor office in Amsterdam, Klaas managed a €500 million portfolio of high-technology, publicly listed companies. The fund’s core strategy for outperforming its benchmark index was to invest selectively in the initial public offerings (IPOs) of high-potential companies. This buy-and-hold approach, often with investment horizons of five to seven years, had proven quite successful over the years. But, the IPO in front of him seemed to defy all traditional valuation approaches. TomTom, a Dutch electronics company, had taken the European navigation market by storm with a series of recently launched commercial satellite navigation devices, also known as global positioning systems (GPSs). TomTom pioneered the concept of the fully integrated, handheld GPS, ready to use out of the box. With its ease of use, TomTom significantly enhanced the driving experience and the feeling of security in foreign cities; it effectively brought GPS to the masses, and its approach facilitated worldwide acceptance. The global market, which stood at some €800 million in 2004, was set to grow to €5 billion by 2010. With a 23% global market share, TomTom held a commanding lead in this exciting market. Overall, the company seemed to have exactly what Klaas was looking for in a potential investee: It was a technology leader with strong potential in rapidly growing markets. The pending IPO would finally offer an opportunity to capitalize on TomTom. But was the initial offering price appropriate? Klaas was puzzled by the extreme range of the valuation provided by his favorite analyst at Fortis Bank: It valued the company from €1.8 billion to €3.1 billion. Klaas decided he would have to go through the whole valuation exercise on his own before deciding whether to invest in the IPO.
