Acquiring RIM: Better Later Than Now

Poor Research In Motion (Nasdaq: RIMM  ) . Once upon a time the company walked proud as the high-tech gadget maker, thanks to its signature BlackBerry email devices and smartphones. But time moves fast in the mobile-tech sphere, and before long, the likes of Apple (Nasdaq: AAPL  ) and Google (Nasdaq: GOOG  ) swooped in and drained RIM's market share. Now the company seems to be falling apart, with many shareholders staying in purely on the hopes of a takeover by a well-funded rival. That's certainly a possibility, but it's dangerous to hold on for too long, since a suitor might not show up for a while.

Down but not out, for the moment
RIM isn't in desperate straits ... yet. The company still has a lot going for it operationally, including a decent cash pile of $1.5 billion at the end of its most recent quarter, a still-healthy research and development budget, and no debt. It also has plenty of good technology to leverage; its proprietary email system remains popular with many corporations and government agencies throughout the world.

What it doesn't have is a future in the mass consumer segment, which is where the serious money is made. Apple's iOS and Google's Android quickly took over the market, as did their associated hardware. BlackBerry's micro-keypad was cool, but it wasn't as fun as pinching and sliding on an iPhone or a Droid.

An even more potent weapon the big guys wielded was their app ecosystem -- iOS and Android users had and have instant access to thousands of little software programs for their pinching and sliding pleasure. Lastly, Apple and Google each made sure to include email as a key feature of their respective operating systems. So nearly overnight, RIM was stripped of much of its competitive advantage.

As a result, the company's business started to deteriorate, and lately that decline has been gathering momentum. It just posted its first quarterly loss, in a period that saw a nearly 20% chop in revenue from the previous quarter. And market share? It's dropping fast. From last November to this past February, the BlackBerry platform fell from 16.6% to 13.4% of total users. Android, meanwhile, advanced from 46.9% to 50.1% in the same time frame, and Apple increased from 28.7% to 30.2%.

For sale: email system and patents, cheap
The company's new CEO, speaking after those results were released and several high-level, longtime executives left the company, said he wouldn't rule out a takeover of the company. Take that to mean "we'll consider all semi-reasonable offers right away." After all, the company's share price has tumbled even faster than its market share -- a year ago the stock hovered in the low- to mid-$50 range; these days it's lucky if it touches $15.

There doesn't seem to be any sunny news on the horizon that'll reverse that trend. The company is necessarily optimistic about the BlackBerry 10 OS, which will be released later this year. However, a glance at its specs doesn't reveal anything unique or new enough to unseat iOS or Android.

So a "for sale" sign is pasted over the company's name, and that sale is more likely to be made in pieces. Again, RIM has valuable assets such as that proprietary email system and a number of strong hardware and software patents.

Speculation is rife about potential suitors. Microsoft (Nasdaq: MSFT  ) is a name commonly bandied about, thanks to its hunger to succeed in the mobile segment. Since its mobile operating system has anemic market share and the company needs something, anything to make it competitive in the mobile arena, BlackBerry's assets could be attractive. The problem is, Microsoft would have to labor to mate those goodies to its existing system, which would eat up precious time and capital.

Nokia (NYSE: NOK  ) is another company mentioned as a possible acquirer. The timing isn't good, though, as Nokia's new phone for the U.S. market is powered by Microsoft's OS. And similar to its partner, Nokia would have a lot of work to do and investments to make to integrate RIM's assets into its systems.

A buy on the decline
The bigger problem with an acquisition is that, even at the current diminished stock price, RIM is expensive. The current market cap is around $6.6 billion. OK, that's small potatoes compared with Apple or Google, but not compared with their cash positions. Apple had $10.3 billion in the green stuff at the end of its most recent quarter -- would it really spend a big chunk of that to buy an email system, some patents, and a bunch of business/public-sector clients that very likely will migrate to it anyway?

Microsoft and even Google have war chests almost as big as Apple, and Nokia also sits on billions. All three are strategic and careful investors, though, and probably won't spend the kind of money RIM would cost to buy the shell of a deflated company.

So RIM will probably stagger on for a while, at least until the BlackBerry 10 comes out, though it's doubtful it'll be captivating enough to woo customers away from iOS and Android. It's even more doubtful that the company will pull an ace out of its sleeve to push its stock higher. Look for RIM shares to continue their decline, with a big-wallet acquirer showing up only when the price dives low enough to make a takeover worthwhile.

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Fool contributor Eric Volkman owns none of the stocks mentioned in the story above. The Motley Fool owns shares of Microsoft, Apple, and Google. Motley Fool newsletter services have recommended buying shares of Google, Microsoft, Nokia, and Apple and creating a bull call spread positions in Microsoft and Apple. The Motley Fool has a disclosure policy. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.


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  • Report this Comment On April 10, 2012, at 9:37 AM, dragonslayer1974 wrote:

    InfoThatHelp - these rants don't help anyone with investing. You sound like an employee that is very bitter about being fired from a company.

    Please stop with the rant - investments are emotional and this does not help the readers of this board.

  • Report this Comment On April 10, 2012, at 10:10 AM, infektu wrote:

    RIM is sitting on $2.1 billion (up last month from the 1.5 you quote).

    If despite having to sell "artificially aged" OS7 for another two quarters RIM will keep making money, then their 6.6bn valuation will start to look even more underestimated than today.

    As such, a potential buyer (assuming it exists, of course) might not want to wait and risk buying at 20-30% over today's price (+premium).

    Also, I am pretty surprised by the figure you give for Apple cash.

    10bn, is that it? I doubt it.

    You say in almost the same breath that iOS and Android emailing is on par with BB (which it isn't) and that "RIM has valuable assets such as that proprietary email system".

    Why is it valuable then?

    As for RIM's "future in the mass consumer segment" (or lack thereof) this is anybody's guess.

    If pinching and zooming on a larger screen did wonders for iOS and Android, then fixing this and bringing all RIM's advantages to a new shiny OS (and interface) should help balance things.

    There are many people that haven't switched away (77M at last count), despite the "lack of apps" of OS7, etc. so it's reasonable to believe that with a fluid touch interface and a speedy processor things should be on the up for RIM.

    Still, we have to see the new prototypes next month.

    re: InfoThatJams

    ignore

  • Report this Comment On April 10, 2012, at 10:10 AM, infektu wrote:

    RIM is sitting on $2.1 billion (up last month from the 1.5 you quote).

    If despite having to sell "artificially aged" OS7 for another two quarters RIM will keep making money, then their 6.6bn valuation will start to look even more underestimated than today.

    As such, a potential buyer (assuming it exists, of course) might not want to wait and risk buying at 20-30% over today's price (+premium).

    Also, I am pretty surprised by the figure you give for Apple cash.

    10bn, is that it? I doubt it.

    You say in almost the same breath that iOS and Android emailing is on par with BB (which it isn't) and that "RIM has valuable assets such as that proprietary email system".

    Why is it valuable then?

    As for RIM's "future in the mass consumer segment" (or lack thereof) this is anybody's guess.

    If pinching and zooming on a larger screen did wonders for iOS and Android, then fixing this and bringing all RIM's advantages to a new shiny OS (and interface) should help balance things.

    There are many people that haven't switched away (77M at last count), despite the "lack of apps" of OS7, etc. so it's reasonable to believe that with a fluid touch interface and a speedy processor things should be on the up for RIM.

    Still, we have to see the new prototypes next month.

    re: InfoThatJams

    ignore

  • Report this Comment On April 10, 2012, at 11:45 AM, HCMFinancial wrote:

    it doesn't make any sense for another technology firm to acquire rim. its culture wouldn't gel with any of the above suitors. the whole transaction would be a huge waste of resources. rim will probably be around a while (the death spiral), then some PE firm will buy it, take it private, break it apart, and cash in.

  • Report this Comment On April 11, 2012, at 6:34 PM, TMFVolkman wrote:

    You folks make some very good points here. RIM's email environment has value because it's a closed system and is considered much more secure than any alternative.

    Having said that, there's really little else the company can offer an acquirer. I'm sure the new OS and upcoming phones will be state-of-the-art, but in this business you need something unique and sexy for the market - it's not enough to offer essentially what everyone else is offering.

    RIM is too rich for everyone's blood now, in my opinion.

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