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By TMFCanuck
September 17, 2007

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Hello Fools,

You may recall a little discussion over GRMN's chief rival TomTom's acquisition of map provider TeleAtlas:

http://boards.fool.com/Message.asp?mid=25711834

For those who don't feel like wading through that post, here's the nub of the present issue:


"Does it make sense for Garmin to take a run at Navteq, and are they for sale? Navteq is up 15% as I write this, the stock is arguably richly-valued, and management's ethos doesn't align well with that of Garmin management (check out the disparity between the compensation practices of each company). But you have to wonder...if TomTom is 'moving up the supply-chain' to control one of the content providers, does this alleviate the disparity in R&D spending between TomTom and Garmin?

Navteq - if it were/is for sale would likely cost GRMN between $6 and $7 billion. Now, GRMN has tremendous cash flows, roughly $1 billion in unencumbered cash on the balance sheet. Zero debt, and would be eliminating their licensing costs, as well as gaining the revenue licensing streams from all non-Garmin users of Navteq data. There is zero question in my mind that they could pull it off and thrive (though I think they'd need to eject the current management)"
.

Are we perhaps at a point to answer that initial question?

Let me back up for a minute.

On 31-May-07, Oakley (NYSE: OO) (the sport sunglasses folks) published the following 8-K.

It deals with a change under what is known as Item 5.02: Departure of Directors or Principal Officers; Election of Directors; Appointment of Principal Officers, specifically, this filing addressed how officers and executives of Oakley were to be dealt with in the event of a change-of-control/severance (i.e. how much cash it was going to take to buy their acquiescence.

You have to admire the timing. Three weeks later Luxottica Group announced their acquisition of Oakley.

So what does this have to do with GRMN and/or Navteq?

On Friday afternoon, Navteq filed the following 8-K with the SEC - note that it's under Item 5.02.

The highlights?

Under 'Amendments to Executive Employment Agreements', the employment agreements for several executives have been amended to require any severance payments to be paid in lump-sum amounts (the previous agreement allowed for either lump-sum or 12 equal monthly installments - choice made at the company's discretion). One of the exec's also had it written into his employment agreement that he'd get the pro-rata portion of is target bonus...you know...if there's a severance (like, say, a 'change-of-control'). I imagine such a bonus might be fairly considerable in a year where a company like Navteq has done so well.

Under 'Severance Arrangements with Executive Officers', the company has approved severance arrangements to provide all executives (except the CEO who has a separate agreement) certain basic terms including:


(i)   an amount equal to the then current annual base salary,
(ii)  bonus earned, but yet unpaid as of the date separation from the company, 
(iii) basic medical and insurance benefits for 12 months.

(Note that (i) and (ii) are payable lump sum).

Now maybe this is nothing. Just a legal "dotting of the 'i's and crossing of the 't's. Or maybe not.

GRMN is the only GPS company where buying NVT makes sense. I doubt a TomTom offer would even be allowed after taking out TeleAtlas (if they could even mount an offer). It would still be a big bite for GRMN - likely the price for NVT would now be closer to $8 billion, meaning it would probably need to be a stock-swap offer (or rather, I think that makes the most sense when you have a richly-priced stock, and the debt markets are such that you might be overpaying a bit if you leverage up to such a degree).

NVT management has essentially nil ownership in the company, so as long as they get their cash goodies, they'd probably not stand in the way of a buyout. The big 4 institutional investors in NVT (Fidelity, T.Rowe Price, AXA Financial, and Capital Research and Management Company) own about 55% of the total shares outstanding, so any offer would have to come at an acceptable premium for those folks to be placated.

So would/could GRMN pull this off?

If they did, it could pretty much be game over in the navigation space. Sure TomTom would scream, but let's face it, TeleAtlas is an unprofitable mess; Navteq is a cash machine. GRMN is about 18-19% of Navteq's revenues, and I'm sure they could find additional synergies (*cough - severance with management - cough*). And then there all those deals with people like Google, AOL/MapQuest, Microsoft/MSN, Yahoo!, and Rand McNally (among others).

In fact, it's in that customer list that I think any reasonable competitor to a GRMN takeover of NVT lies. GOOG or MSFT obviously have substantially greater resources than does GRMN. Either could slurp NVT up without even noticing.

Anyway, just some idle musings for a Sunday evening.

Jim