Research in Motion: Vulnerable to a Takeover Bid?

Includes: BB, GOOG, HPQ, MSFT, NOK
by: Mark McQueen

ImClone, Wachovia, WaMu, Lehman and Merrill Lynch are just a few of the names that have been picked off by the M&A angels over the past few weeks. A short year ago, each was fiercely independent with a seemingly bright future. For a variety of reasons, each is now (or soon to be) a subsidiary of a larger firm.

It wasn’t all that long ago (June 2008) that Research In Motion (RIMM) (TSE:RIM)  was sporting a market capitalization of $83 billion. As of tonight, the market cap has shrunk to $32.5 billion. Depending on which equity research analysts you believe, RIM is trading at 10-15 times 2010 earnings. A few weeks ago, these same analysts thought that 30-35x was an appropriate figure. My, how times change.

Without a doubt, RIM is and will continue to be a profitable company with plenty of cash, no debt, and a bunch of new products (Bold, Storm and Pearl Flip)  rolling out at this very moment around the world. But, sadly, that doesn’t mean that it will be able to resist an opportunistic takeover offer from the likes of Microsoft (NASDAQ:MSFT) et al.

The best positioned to do a deal is certainly Microsoft. It has not been shy about using timing and brute force to attempt to expand its empire (think Yahoo), and the Zune never really got off the ground. With a $212 billion market cap, annual profits of ~$17 billion, and cash of about $25 billion as of June 30th, they can certainly afford to swing a deal. And it might even be accretive to earnings without the need for big synergies. I recognize that the idea has been pooh-poohed in the past by the likes of the respected Eric Savitz , but that was when RIM’s revenues were just $5.5 billion and the market cap was $46 billion; the run-rate revenue has doubled since then, yet the market cap is down 33% since his 2007 Barron’s story dismissing the idea outright.

Hewlett Packard (NYSE:HPQ) is smaller than Microsoft, it also trades at 12x earnings, and was rumoured to have been interested in acquiring RIM earlier this decade, which caused RIM shares to jump 20% in the space of a few days. The iPaq was almost as “useful” as the Palm, and with no cell phone offering HP might be tempted to re-engage on the topic. If HP liked RIM with fewer than 2 million subscribers in aggregate, they must love it now that Jim and Mike are adding more than 1 million additional subscribers each and every month. Just because the 2006 $4.5 billion acquisition of Mercury Interactive was a stretch shouldn’t mean that a deal for RIM isn’t warranted, although the large share component wouldn’t likely tempt many in today’s market.

Nokia (NYSE:NOK) is an oft rumoured bidder for RIM, but with a relatively modest market cap, a weak EPS multiple, and only $8 billion in cash, it couldn’t get close to offering something of interest to shell-shocked RIM shareholders.

IBM has resources, of course, but the lack of interest in consumer products must ensure they sit on the sidelines of any RIM M&A party.

One can’t count Google (NASDAQ:GOOG) out of the picture, if only because they seem to be so unpredictable. Although they don’t have the cash to compete with a Microsoft bid, they have a lofty EPS multiple, which certainly means they can offer an excellent premium if an all-stock deal would work for RIM’s institutional shareholders (which I doubt).

Round and round the horn one may go on this issue, but you always come back to mighty Microsoft. To think that we investors thought RIM was “cheap” at $115/share just a few weeks ago. But not even a partial nationalization of the British banking system nor a coordinated 50 bps rate cut can keep the Dow futures in the black at this point.

Hedge funds need capital for feared redemptions. Mutual fund managers yearn for anything to differentiate themselves from the pack. RIM’s largest shareholders can’t help but hit a decent bid, and in Canada, RIM’s Board of Directors can’t try the “Just Say No” takeover defence that worked wonders at Yahoo (my, how Yahoo shareholders must regret that decision, in hindsight.)

“This would be looked at as a gift” if it came, said the seasoned head of one Canadian sales desk. It would be extremely bad news for the Canadian technology market, mind you, but if you are a PM at Fidelity (35 million shares), TD Asset Management (27 million) or Janus (21 million), and you can enjoy an immediate C$700 million market-to-market gain in your funds, right before the end of the fiscal year…you hold your nose and take the money.

I certainly don’t wish this on one of Canada’s greatest companies, but there is no reason to believe that RIM is immune — through no fault of their own — from the brutality of the current capital markets.

All amounts in US$ unless otherwise indicated.

Disclosure: I own RIM.