Research In Motion's Biggest Risk Could Be A Hostile Takeover Bid By Microsoft

| About: BlackBerry Ltd. (BBRY)

I'm losing sleep over the risks of a hostile bid from Microsoft Corporation (NASDAQ:MSFT) for Research In Motion Limited (RIMM). No, I am not referring to the various buy-out rumors that have come up in the past year or so, or even the talks about HP. I am addressing the increased chance, in my opinion, of a buy-out now from Microsoft, based on recent events and the unveiling of the BlackBerry 10.

As someone who has observed the mobile platform space for quite some time, I will make a case of why it makes strategic sense for Microsoft to take over Research In Motion at this juncture. Although nothing has been officially announced, I believe this could be a high-probability event that investors should prepare for.

And consequently, while this could potentially be an opportunity for short-term investors and speculators alike, it could also be detrimental to Research In Motion shareholders who are invested in the company for its long-haul turnaround potential.

Research In Motion's CEO Thorsten Heins has made no secret that he is going after the #3 spot in the mobile phone platform market - or more accurately, he wants to keep that spot, as RIM is currently still at #3. But this is precisely the piece of the pie that Microsoft is also after with its Windows Phone 7, and later its Windows 8 platform.

RIM's success in keeping the #3 spot is by no means guaranteed - but let's first look at the cost side of the equation. To put things in perspective, Microsoft paid $8.5B for Skype. At the current depressed level, RIM is only worth around $4.5B - buying RIM could be one of the cheapest ways for Microsoft to permanently cement the third place position for itself. Microsoft needs to focus on taking on Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG) Android; it doesn't need to have RIM coming at it from the backdoor.

It may or may not have been a consideration in the past when RIM was written off for dead, but the winds are changing. The recent BlackBerry Jam was generally considered to be a success, and BlackBerry 10 pre-production units (the "Dev Alpha B") are already receiving raving reviews. More importantly, RIM is planning to launch the OS with the highest number of apps for any first-gen platform in history.

Even if the BB10 launch turns out to be just "so-so", where Research In Motion is only able to sell to its existing user base of 80M (which is a low hurdle at this point), the company will still be de facto #3, which is severely damaging to Microsoft's nascent mobile ecosystem.

Well, $4.5B is chum change for Microsoft, but granted - a friendly bid at this price will not work because the entire RIM board is against selling out. Microsoft will have to offer a hostile bid with a large premium to get all of the small investors and outside institutions to sell their shares in order to gain a majority over the RIM insiders. It is difficult to judge how much of a premium will need to be offered to gain a majority, but even a 100%-plus premium from the current price point amounts to only $8B or $9B, which is still a minor cash outlay for Microsoft.

In the grand scheme of things, it will be worth it for Microsoft even if it just buys RIM and kills off the company's technology, thereby eliminating an unquantifiable but potentially fatal risk. Microsoft cannot risk having a fourth place platform. The company absolutely needs to build a solid ecosystem in mobile to compensate for a dwindling desktop market.

Unfortunately, this could be one of the worst things that happens for true long-term RIM shareholders and BlackBerry believers. Many are looking forward to much, much bigger gains from RIM, as it hopefully rides the power of the QNX platform to engineer a long-term turnaround, and as it expands to become a significant player in pervasive mobile computing. RIM needs to buy some time for the platform to mature and to not have its vision cut short by a hostile bid.

As a RIM bull, I hope my gut instinct about a looming buy-out is dead wrong. If it were to happen, however, I advise long-term shareholders of RIM to vote against any such bid.

Disclosure: I am long RIMM. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.