Research In Motion (RIMM) has been a hot stock since the latest earnings "beat," in which the company's cash balance actually slightly improved Q/Q despite the company posting yet another net loss. Since the report, it seems that several short sellers have found themselves squeezed out of their positions as the stock has managed to rise well over 20% within a matter of days. More importantly, a very interesting piece from fellow author Gene Chan, "Research In Motion's Biggest Risk Could Be A Hostile Takeover Bid By Microsoft" popped up.
Mr. Chan makes the case that RIM shareholders have every right to fear a hostile takeover bid from Microsoft (MSFT), another competitor vying for the #3 space in the smartphone platform wars. He further notes that a such a bid - even at a 100% premium to the most recent closing price at roughly $8B - would be chump change for Microsoft, which has $62B in the bank and only $12B of AAA-rated debt.
I, however, firmly believe that Microsoft is unlikely to attempt a hostile takeover of RIM for the following reasons:
Hardware Business? No, Thanks
By purchasing RIM, Microsoft would also be paying for the hardware side of the company. It seems unlikely that Microsoft would have any intentions of competing aggressively in the smartphone hardware space for a number of reasons:
Low Margin, Cutthroat Business
There are a vast number of vendors that are ready to design and sell Windows Phone 8-based devices. Samsung (OTC:SSNLF), HTC, and Nokia (NOK) all have excellent devices lined up. Further, these companies have extensive expertise when it comes to developing successful, high-volume phones. These companies operate with razor-thin margins.
Now, the natural tendency is to point to Apple (AAPL) as an example of a high margin, vertically-integrated competitor in the smartphone space. Microsoft could certainly buy RIM and maintain a gross margin advantage over any potential Windows Phone 8 licensees, but Microsoft's brand identity and its business model just don't set the company up particularly well for that.
The bottom line is that it would be a fairly large risk, especially as the company would be fighting Apple as well as every established Android phone vendor. From a risk/reward standpoint, it simply makes more sense to sell high margin software licenses and to focus on developing the platform and let the specialized hardware companies do the "dirty work" of building and selling the devices.
A Reference Design?
Microsoft, however, has dabbled in the hardware space. In particular, the company has touted its upcoming "Surface" tablet. I believe that the "Surface" mainly serves as a reference design in order to give the OEMs guidance as they enter the brave new world of Windows-based tablets.
I could see Microsoft doing something similar with Windows Phone 8, but given that Microsoft's Windows Phone ecosystem is fairly established, the necessity for such a design is likely unnecessary. And even if this were to happen, Microsoft doesn't need to spend several billion dollars on an acquisition to make it happen.
Buying RIM To Shut Out Competition?
A more interesting scenario is for Microsoft to purchase RIM with the intention of getting rid of the "BlackBerry" lineup altogether. Microsoft would retain all rights and patents and then just throw away the rest of the operation. As Mr. Chan notes in his piece, Microsoft and RIM are both fighting for the #3 spot after the Google (GOOG) Android platform and Apple's iOS.
However, unlike Apple, RIM is just another smartphone vendor. Sure, it has its own operating system platform which provides some degree of differentiation, but in all likelihood, it will be a turn-off to developers. As a software engineer, why in the world would I write any significant app for a platform with only one fairly weakly positioned vendor with a track record of failure?
Microsoft's platform, on the other hand, is supported by one of the largest, most successful companies in the world. Furthermore, the devices built on this platform will be shipped by a number of very well regarded vendors.
In the race for #3, RIM's proprietary platform is unlikely to see any particularly wild success. Microsoft's job is to steal market share from Apple and Google by bringing over the independent phone vendors to the Windows Phone 8 platform - RIM's not even part of the equation at this point.
Microsoft buying RIM? Probably not going to happen. The closest to this that I could see Microsoft getting is an acquisition of Nokia, but even then, there's not any particularly good reason to do so. Microsoft's job is to sell software, not hardware. If it needs to give the hardware guys a little nudge in the right direction by producing what are essentially reference designs (e.g. "Surface"), then it will do that. But on the Windows Phone 8 side, the partners know how to do phones, and Microsoft's focus should be on making Windows Phone 8 the best darn operating system available.
Additional disclosure: I may initiate a long position in AAPL over the next 72 hours.