Microsoft (MSFT), like City Hall, is the established bureaucracy and its stakeholders often feel like powerless constituents. Unfortunately for the small investor, the lack of a democracy in a stock proxy only empowers Steve Ballmer and his administration. Mr. Ballmer will play the role of our Mayor, a career politician who has done absolutely nothing for the stock price since he has come into office. The products that have been launched during his tenure such as Windows Vista, Zune, and yes, the Microsoft “Windows” phone, have failed to gain traction. The failed bid for Yahoo (YHOO) was like watching the movie “Dumb and Dumber”, sorry to say. The non-techie like me has traded in his PC for a Mac, and lo and behold Apple (OTC:APPL), the anti-establishment, has now become just what its biggest supporters have feared most.
Microsoft’s lack of creative vision and failure to execute is no longer startling, but commonplace. The retail Microsoft Store did not drive product interest, nor did it increase the bottom line. It just gave the disgruntled a place to go and complain when getting those nonsensical pop-up messages. Microsoft and Steve Ballmer need to realize one thing- You are not Apple and you are not Google (GOOG), so stop trying to be them! With all this said….Guess what? It’s still good to be City Hall.
Microsoft sits on almost $50 billion in cash, or $5.78 a share and also pays a dividend of 2.7%. Earnings are expected to be over $20 billion going forward; Mr. Ballmer, surely you can do better than maintaining your failed policy of executing the status quo? The first trial into the smartphone market failed within weeks, and the likelihood of creating another profitable organic hardware system like the X-Box is virtually nil. What needs to be done is something extremely logical and affordable. Rumors were that Microsoft was going to partner with Nokia (NOK), and there was even more speculation that Microsoft was then going to buy some or all of that company. Forget about buying Nokia (which you’ve done, correctly I might add). If Microsoft is on the acquisition path, Research in Motion (RIMM) is more compelling purchase. A buyout is the best way and really the only logical way to gain share in the hardware side of the smartphone market. An acquisition of Research In Motion does not stop Microsoft from licensing its software to Nokia, it makes Microsoft a more dominant player in both the hardware and software side of the industry. The Android has been taking away market share from Blackberry and even the iPhone, so a purchase of Research in Motion would put both Google and Apple on the defensive. Research in Motion also has other product lines such as tablets and personal computers which could also be another “smart” hardware market to get into as well.
Research in Motion’s market cap is now under $20 billion, with no debt, plenty of cash flow, and a solid footprint in the smartphone market. Nokia on the other hand is larger, leveraged with high-yielding debt, and offers product lines not applicable to Microsoft’s core business. Blackberry currently supports Windows and MS Office, so further integration would appear to be easy to accomplish. So if the rumors are right, and Microsoft is going to make an acquisition, Research in Motion would appear to make the most sense.
We estimate that a fair price for Research in Motion would be a 30% premium or approximately $49 a share. Microsoft could buy Research in Motion and still have plenty of cash still left on its balance sheet. A buyout would give Microsoft an immediate 30% share in the smartphone market. Sound execution on cost cutting efforts coupled with bridges in its technology could pay for the deal in just a few years. Although we must make a big assumption that the newly merged Research in Motion, now a division of Microsoft would still be earning the equivalent of over $6 a share.
Say what you want, but any deal is better than the .1% Microsoft is earning on its cash… Well, unless it’s buying Yahoo.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.