Amazon: Research In Motion Investors' New Best Friend

Dec.21.11 | About: BlackBerry Ltd. (BBRY)

Last week I wrote an article about Research In Motion (RIMM) and my change in position from bearish to bullish (click here to read). This was immediately after writing an earnings preview warning the market was pricing in a continuation of disappointments. The shift from bear to bull (which happens very seldom for me) was simply a case of the bears getting ahead of themselves. While the earnings release did indeed provide investors with another example of management's inability to manage, the stock price reached a point of having very little left to lose.

I calculated the "scrap metal" buyout price of RIM over several different scenarios and each time I came up with a number of $12.86 per share or higher. Even without a buyout to be had, the numbers I was calculating put a floor of $8.57 per share. I also didn't believe RIM would get carted away in pieces and the odds favored either a buyout or a turnaround in the downward circling of the drain.

The wonderful aspect of stock options is they allow for so many different types of approaches to the same problem. The problem I faced trying to catch the RIM falling knife is the knife can go in very deep before removal and causing a bloody stop loss to occur. I know as I have a hand full of scars to prove it. If you don't believe me, feel free to ask Whitney Tilson what it feels like to be dead on, and only end up losing because it takes the market so long to figure it out. Mr. Tilson was clearly the smartest guy in the room when it came to Netflix (NFLX) earlier this year.

Starting on Friday I have had one eye on RIM and put the charts on a main monitor with so many lines, colors and indicators, the screen looked like one of my two year old's crayola pictures. It took until today with less than an hour in trading left in the day to have all the ducks in a row and allow me to put on the position.

About an hour and a half later the news broke from Reuters that the longs have been waiting to hear. Someone, and not just anyone was interested in RIM. Amazon (NASDAQ:AMZN) was investigating a merger with RIM earlier this year according to reports. To put the icing on the cake, Amazon was/is not the only company looking at RIM. Shareholders clearly were jumping up for joy as they were able to put the checkbook and pen away that was about to be used to send another margin call payment to the broker. As the news settles in though, new questions start to emerge from the story. With a little further thought it becomes clear a lot of shareholders are going to be very angry at the twins (co-CEOs). If you haven't figured it out yet, let me explain.

Firstly, if Amazon was interested in RIM this last summer, that means they were interested at a price presumably higher than $25 per share. If we use $25 as the average late trading price and a modest premium of 30% we have a takeover price of $32.50 a share. Round up to make it sound more appealing to shareholders, and we have a floor price of $33 and I believe a case can be made for north of $35 a share.

Even my two year old knows 35 crayons are a lot more than 12.52 crayons. Given a choice between the two, I know which one he will take. Interestingly enough, if the timing was while RIM was trading above $30 a share, an offering price of $37.56 is totally not out of the question (regardless of the trading price at the time this would not be out of the question). This would appear to mean that shareholders own in assets as of the closing price today ($12.52), about one third what shareholders would have owned had RIMM tried to do some sweet talking instead of playing hard to get. If you owned shares of RIM through the summer take a look at your statement and multiply the number of shares you own by $25 and you probably have a good idea of how much money Mr. Balsillie and Mr. Lazaridis have cost you in the last six months. As I stated in this video, even at a $1 per year, they may be overpaid.

Finally the news is out, now what?

We know a few more things that we didn't know yesterday. We know that at least one company is interested and likely more than one. We know that market share has fallen since the summer and so the company's real value has fallen even if not as much as the stock price has fallen. We know that it is unlikely Apple (AAPL) or Google (GOOG) will want to see Amazon step into the arena. Both heavyweights would rather see a smaller competitor in control of RIM.

We also know that short sellers have been officially notified RIM may be currently at the best possible buy-back price. With over 8% short interest based on the latest report in November, a squeeze maybe just around the corner.

Investors have been highly patient with RIM and the management team. More patient than I would care to be as the stock price has imploded. Jaguar Financial was front and center calling for a change of management structure months ago, and backed away from demands in order to provide every opportunity for management to regain its footing.

It would appear any new calls for a shake up in the tower may come from a much larger investor base. One also would have to believe the twins will at some point become tired of the non-stop cries of the little people for bread and give up the kingdom. This may happen through a sale or through a change of management. One can do more than hope now, as the genie is out of the bottle and I doubt investors will put it back in.

I expect RIM to test the next resistance level of $14.84 this week and $16.75 is my next target after based on the current chart. I will look to add to my current short put position tomorrow and hope to put on a full size position by the end of the day. It will be interesting to see what the premium trades for after this news, and I would expect premium to jump. This will not allow the puts I wrote to fall very much, but should make for excellent volatility selling at the open.

Disclosure: I am long RIMM and currently short RIMM put options and may initiate further shorts of put options within the next 72 hours.