I think that Research In Motion's (RIMM) shares present a compelling value at current levels purely based on the company's strong balance sheet and its great ability to generate free cash flow. When I recently suggested that RIM stock was cheap, I did so on the basis of its business outlook, and not because I think the company will be acquired. Frankly, I think a lot of the acquisition hype is unfounded. People have been throwing out all sorts of potential names as acquirers, including such head-scratchers as Apple (NASDAQ:AAPL) or Google (NASDAQ:GOOG). I really don't see either of those deals happening unless RIM's shares fall much further.
That said, I do think that if there is to be an acquisition in the near future, there is one logical buyer no one is discussing: Oracle (NYSE:ORCL). The case for Oracle buying RIM is quite simple: Their businesses could form interesting synergies together, Oracle has a ton of cash burning a hole in its pocket ($24 billion or so) -- they could buy RIM at a premium with cash to spare, and Oracle needs to do something big to keep growing.
RIM in particular would be a great buy for Oracle precisely because there are so few bargains across the tech space. Oracle CEO Larry Ellison noted this last week in a conference call, where he spoke frankly about the lack of value in potential acquisitions. The Wall Street Journal's Deal Journal quoted Ellison:
“Anyone looks at the valuations today, and we don’t think they make any sense,” a rather impassioned Ellison said on a conference call with analysts last night. “If these assets are wildly overpriced, we can’t make a good business case for buying them.”
As far as I can tell, there's only one enterprise priced cheaply enough and that is large enough to move the needle and be immediately and powerfully accretive to Oracle's earnings. Trading at five times earnings, RIM could immediately increase Oracle's earnings by perhaps 40 percent. (Oracle had net income, according to Yahoo! Finance of $7.7 billion last year, RIM had net income of $3.3 billion.)
Besides bringing Oracle growth and moving profits upward, a RIM acquisition would create synergies between the two companies. Both Oracle and RIM have long been focused on the business market rather than consumers; in recent quarters, RIM has struggled to maintain its prestige and market share within the business market; a combination with deeply respected Oracle would help staunch the loss of customers to other platforms. Also, under Oracle's leadership, RIM would certainly be large enough to retain the resources and personnel necessary to compete with Google and Apple on the technology front. While there are concerns that RIM is too small to compete now, if Oracle buys RIM, those concerns would be alleviated.
Both companies are also strong internationally. Just under half of Oracle's revenues are generated outside of North and South America, while RIM has seen its international sales rise nearly 70% year over year. Unlike in the Americas, where RIM has been struggling, RIM has been gaining momentum internationally, and with an even stronger, internationally-focused partner such as Oracle, RIM would have the opportunity to become an entrenched market leader in the international smartphone space.
Due to its operational focuses, both international and on business customers, RIM would be served well by having Oracle as its corporate parent. Other than making RIM more profitable, Oracle would gain benefits for its own operations by acquiring RIM. Oracle has long struggled to come up with a successful phone strategy, which has left it in a less than ideal competitive situation against other software makers. By purchasing RIM, Oracle would have the chance to create a "software ecosystem" that would be developer-friendly on the next generation of RIM phones. Also, lingering issues with Java as a mobile platform could finally be solved.
Oracle would also gain from RIM's technology. For example, Oracle's products could benefit from some of RIM's innovation. In particular, I have to think there would be interesting uses for RIM's expertise within the GPS space that could be implemented into Oracle's software. That's just one of many potential areas where RIM's research and patents could be useful. Even if RIM is unable to regain its old place as a dominant smartphone maker, simply moving all its intellectual property into Oracle's back office would do wonders for Oracle. Put a great deal of IP into a bigger umbrella, and good things are likely to happen.
Remember that even Nortel's patents are likely to fetch several billion dollars. The amount of research, patents, and brainpower that Oracle would receive from buying RIM is great in comparison with the cost. If Oracle wants to truly grow its operations into a whole new sector and try to build an ideal software ecosystem for security-minded enterprise customers on smartphones, then Oracle should give a long hard look at buying RIM. While Oracle can continue to try to carry on without a coherent software strategy for smartphones and perhaps be successful, it will do much better if it purchases a hardware maker.
The deal would probably be messy (it is unclear whether the Canadian government would approve a deal, among other potential issues), but the purchase would be immediately accretive to earnings, it would make Oracle again a growth name rather than just a cash-rich company with steady profits and a dividend, and it would, if handled well, give Oracle the opportunity to create a seamless work environment for its customers on smartphones, offering them all the advantages of Oracle's software, Java, and the upcoming revolutionary QNX operating system in one package. Particularly in international markets where both Oracle and RIM's brands are already strong, the two could form a powerful combination.
Financially the deal also makes sense. In addition to boosting Oracle's profits in the short run, purchasing RIM gives Oracle the opportunity to revalue RIM's operations upward. Much of the decline in RIM shares is due to the market's lack of confidence in management and questions about whether RIM is a viable standalone entity. Make RIM a subsidiary of a strong corporate parent with respected management and similar business strategies, and the market's concerns will be greatly reduced. In one fell swoop, Oracle will be able to make RIM a more attractive property than it now is and in doing so, RIM could add significantly more to Oracle's market cap than the acquisition would cost.
Will this deal happen? Probably not. But on paper it makes sense, and stranger ([[EBay]] buying Skype) things have happened in the tech space. As Larry Ellison said, there are very few bargains that Oracle could buy presently. If he wants to make a big deal, RIM is the most logical of his options.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.