Seeking Alpha
Long/short equity, special situations, event-driven, contrarian
Profile| Send Message|
( followers)  

Last week we witnessed Research In Motion's (RIMM) shares increase from $11.85 to $14.04 on Friday. This came on top of unusually high trading volume. It appears that there is an accumulation of the stock in progress. Could there be a deal in the works to buy RIMM? The apparent accumulation of shares could be indicative of a takeover, an event for which the company seems to be positioning itself.

Here is a price action and volume chart of last week's activity:

Here is why we think RIMM is positioning for a sale of the company:

1. In January 2012 RIMM retires its co-CEO's Jim Balsillie and Mike Lazaridis, who is also the founder of RIMM. They were replaced by Thorsten Heins. In addition, Prem Watsa of "Fairfax Financial Holdings Limited - a financial services holding company whose corporate objective is to achieve a high rate of return on invested capital and build long-term shareholder value." joins the board. Mr. Watsa is arguably a shareholder activist and like Carl Icahn seeks deliberate corporate change to increase share prices.

2. January 2012- Heins embarks on a $1 billion operating cost reduction plan. He also takes over the development for the BlackBerry 10 new product project.

3. Heins initially envisions RIMM as more open and friendly to the consumer user as opposed to the company's previous focus on the CIO controlled enterprise market. Balsillie disagrees and is asked to leave the board. Many see this as a sure sign for positioning the company for sale.

4. Heins revises his position on consumer market and announces they will now refocus on the enterprise market.

5. April 16th, Bloomberg reportedly says RIMM hired bankers and Henry Blodget gives list of possible acquirers.

6. May 29th-RIMM formally announces via a corporate press release titled "business update" it is engaging JPMorgan and RBC Capital Markets "To further enhance our commitment to successfully completing our transformation....".

7. November 2012- BB10 launch for the end of January 2013 seems on track with a condition the popular RIMM Qwerty keyboard will not be available until late Spring 2013.

8. December 7th to December 14th, RIMM shares rise on heavy volume from $12.01-$14.04 or nearly 17%. This is not an earnings based optimistic rise as many believe there is no good news for the company until BB10 is released. However, Microsoft's apparent success with its Windows 8 smartphone software together with Nokia maybe foreshadowing positive vibes for BB10. A recent SA article says there is only room for 3 smartphone platforms with Google's Android number 1 and Apples iPhone at number 2, it predicts that Microsoft's (NASDAQ:MSFT) Windows 8 is already number 3 and therefore they recommend being short RIMM until and unless it breaks $16/share on the upside.

9. Earnings for the latest quarter ended December 1,2012 are scheduled for release on December 20, 2012 after the market close. Expectations remain low for earnings.

Our last article articulated the strategic and financial strengths for RIMM. Here is updated summary:

RIMM's STRATEGIC ASSETS

1. RIMM's 3300 US patents

The joint bid between Google (NASDAQ:GOOG) and Apple (NASDAQ:AAPL) on Kodak's patents shows that intellectual property remains on everyone's radar screen. RIMM internally values their patent portfolio at $1 million each for each patent or $3.3billion. Analyst Peter Misek last year put a $2.5 billion value on this portfolio which included the jointly owned Nortel portfolio which RIMM reportedly paid $780 million out of the $4.5 billion paid by the consortium of Apple, EMC, Ericsson, Microsoft, RIMM and Sony.

2. Blackberry Messenger

It's clear there is an assault by private and social networks to redirect traffic away from cellular phone networks via the internet. This has clear revenue implications for cell phone operators and yields more "stickiness" (hours of users engagement) for these networks from its user base by lowering their user's cell phone messaging charges. A quantum leap in this pursuit would be buying RIMM and getting the Blackberry Messenger network { BBM } private messaging network which recently announced free voice service. BBM is regarded as a secure alternative to SMS messaging. However, it is currently closed to users other than Blackberrys. This security comes from the Blackberry PIN system BBM is built upon. BBM together with RIMM's undeniably reliable email service has been estimated to be worth $1.6 billion alone.

3. Cash, Fixed Assets, Receivables, No Long Term Debt

RIMM's 3/3/2012 numbers from their latest available audited balance sheet (values in 000's) show total current assets of $7,056,000 and total liabilities, both current and long term of $3,631,000, reveals net assets excluding long term assets of $3,425,000. To be conservative, we subtract inventory and other assets totaling $1,392,000 and end up with $2,033,000. Using a total share count of 516.37 million at $11.69 per share, the $2.033 billion in cash is less than 1/3 of a $6.036 billion market-cap.

4. Loyal Enterprise Customer Base

RIMM's loyal enterprise customer base reportedly has between 70 and 80 million overall users with 20 million being business users commanding a dominant enterprise 63% market share.

5. Sell Or JV the Hardware Business.

This certainly may be a low risk way of exploiting the hardware business without operating it. The buyer can sell or joint venture the hardware business to Microsoft, Apple or Nokia who want to rid themselves of this competitor. A strategic buyer can embed their apps in these phones as part of the JV/sale deal. Given all the opportunities the deal presents, the current RIMM share price seems to be a bargain for strategic buyers of their assets.

We conclude the rise in RIMM is strategic in nature and has nothing to do with the BB10 launch or anticipated positive earnings to be reported on December 20th. The bankers have presumably done their job and Watsa should be overseeing the process as Carl Icahn did with Motorola in a similar situation in this industry last year. If the shares do break the target of $16, another catalyst may kick in- short covering- which will take the shares higher. Anecdotally, we have watched SA short-sellers declare resistant levels for a stock on the upside only to see bulls use them as a target to break. Under the takeover scenario, you can be sure the strategic buyers are watching RIMM shares and don't want to see the price go much higher before they submit a takeover bid because such a bid needs to be at a premium to the previous closing price. RIMM has done a great job preparing itself for a strategic transaction while developing and promoting its BB10 launch.

Source: RIM's Rise Likely For Takeover Talk And Not BB10