Nokia and RIM: Ripe Patent War Takeover Targets

 |  Includes: AAPL, BBRY, GOOG, MSFT, NOK
by: Investment U

By Ryan Cole

All week, the investing world has been abuzz with talk about Google’s takeover of Motorola Mobility. That’s all fine and good, but it misses the point… That’s mere idle chatter – water cooler gossip. What matters isn’t the last takeover. It’s the next one. And, with Google (NASDAQ:GOOG) now becoming one of the top 10 patent holders in telecommunications, we can expect plenty more movement in the sector.

Two targets appear the most attractive. They’re the number one and number two patent holders in the mobile space. And they’re both formerly successful companies struggling to keep up. They are Research In Motion (Nasdaq: RIMM) and Nokia (NYSE: NOK). And one is much more attractive than the other…

Reasons Why RIMM’s a Juicy Takeover Target

To put it bluntly, RIMM is a mess.

  • Its operating system is generations behind the efforts of Apple (NASDAQ:AAPL), Google and even Microsoft (NASDAQ:MSFT).
  • Its corporate structure is so messed up, open letters from high-ranking employees have appeared on tech blogs, complaining about how things are run, with suggestions for improvement. (The suggestions were not well received by RIMM’s PR team, at the very least.)

The one thing RIMM has going for it is the richest patent portfolio in the sector. And, if we use Google’s price of $12.5 billion for Motorola’s 17,000 patents, RIMM’s going rate (assumed to be between $20 and $30 billion) is a relative bargain.

There’s little doubt that, unless the patent wars cool down or RIMM suddenly turns its fortunes around, the company will remain a very juicy takeover target. It’s really only a matter of time.

Nokia’s Logical Takeover Suitor Still Denies Interest

But Nokia is the finer plum. Consider…

  • Nokia holds nearly as many patents as RIMM.
  • While Nokia lags in mindshare – especially in the United States – it remains the largest handset manufacturer in the world – especially overseas.
  • Nokia has some very lucrative deals in place.

What’s more, Nokia has a logical suitor – one often rumored to be exploring a deal, despite vehement denials from both sides.

That suitor is Microsoft. Already, Microsoft is paying Nokia to make Windows Phone 7 its primary operating system (details of the deal remain unknown, but it’s believed that Nokia gets paid for every Windows phone it sells). Former Microsoft Executive Stephen Elop is now CEO of Nokia – and he brought a number of other Microsoft VIPs with him.

Why Microsoft’s Experience Matters to Nokia

Further, Microsoft – unlike Google – has some experience with hardware. It’s unclear whether Google mostly wanted the patents, or if the company wants to get into the handset game, as well.

With Microsoft, there would be no question: The company has succeeded with the Xbox, and it likely will try to do the same with phones.

In addition, Nokia’s new operating system – the MeeGo – has been drawing rave reviews. Windows Phone 7 – while warmly welcomed – could use some of those accolades for itself, as Microsoft tries to catch up to Android and iOS.

Finally, Microsoft has enough cash on hand that it can buy Nokia outright, for cash.

Microsoft already has a cozy relationship with Nokia, it has the most to gain from a partnership, and it needs to start behaving aggressively if it hopes to catch up to competitors. Don’t pay any attention to denials from company PR: This deal is more likely than not.

And if Microsoft can’t pull the trigger, someone else will. After all, Apple is adding weapons to its patent arsenal at a breakneck pace… RIMM makes more sense for Cupertino, but Apple could easily afford both and still have more cash than it can spend. And Google might not be done – it still lags the others in patents.

As this patent war extends, expect a greater build-up of weaponry. This chess match is still in its opening moves.

That means there’s plenty of opportunity for gains, if you get to a company first.

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