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Rumors Microsoft might buy Garmin -- five reasons to do this deal

Garmin (GRMN) has been on a rollercoaster lately. First, Nokia (NOK) announces they are buying Navteq (NVT). That day, Garmin takes an almost 10% dive because Navteq provides the mapping data used in all Garmin's GPS systems. The only other significant provider of mapping data, Tele Atlas, is in the process of being bought by GPS-system competitor TomTom. Investors fear that Nokia could put the squeeze on Garmin if they so choose.

Then comes the rumor Microsoft (MSFT) is going to buy Garmin and the shares notch a 5% gain.

Neither Garmin nor Microsoft have been willing to comment on the rumors.

Background on Garmin --

Based in Kansas, Garmin is the current leader in the portable GPS industry, well ahead of U.S. rival Trimble. The company sells more than 50 GPS products, including portable in-car navigation units, aviation systems, marine products and pocket-sized receivers for hikers, hunters or other outdoorsmen.

5 reasons Microsoft should buy the company --

1. Microsoft needs to add heft to its in-car platform initiative. Microsoft's initial release will be a product called Sync. It is being cast as a communication and entertainment system, integrating cell phones and MP3 players and offering hands-free features. Partnering with Garmin allows Microsoft to combine Sync with Garmin's in-car navigation system to create an integrated computing platform that does something more useful than play tunes and make phone calls. Sync is due to be rolled out in several Ford products in 2008. A similar Microsoft product is already available in Fiat cars in Europe.

2. A Microsoft-Garmin combination would strengthen the two companies' existing relationship. Garmin has a deal in place with Ford and Microsoft. Garmin already sells its top-of-the-line navigation units in Ford products. The devices use MSN Direct to provide traffic data that enables dynamic routing around traffic accidents, road closures and construction. Like Sync, the Garmin devices also use Bluetooth for cell phone integration and include an MP3 player. It appears Garmin has made more progress than Microsoft (who has only announced that navigation is a feature to be added in the future) so it would be a clear benefit for Microsoft to acquire working technology (see reason #1). As for Garmin, having Microsoft standing behind it would strengthen its position vis a vis Nokia/Navteq and Tele Atlas/TomTom.

3. The price is right. Garmin, which currently has a $24 billion market cap and a stock price north of $110, may actually be reasonably priced. The company's P/E ratio (36.95) and growth rate (38.04%, based on the average of the three-, four-, and five year EPS figures) make for a PEG ratio of only .97, a level that implies the stock would be a buy for investors looking for growth at a reasonable price.

4. Garmin's fundamentals are strong. Garmin has no long-term debt. Sales have been increasing faster than its inventory. Last year, its inventory/sales ratio was 19.44%. This year, it dropped to 15.28%.

5. Microsoft has a huge cash hoard. Thanks to reasons 1, 2, 3 and 4, it seems there could be many worse things to do with the money than buying a growing company like Garmin, one of the few pure plays left in the mapping space.

Disclosure: author does not own shares of MSFT, GRMN, NOK or NVT
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