Not likely: A deal for the BlackBerry maker would be hostile and pricey. Canadian national pride might get in the way, too
The plunge in Research In Motion's (RIMM) share price has fueled speculation that the maker of smartphones is vulnerable to a takeover—but buyers are unlikely to go BlackBerry-picking anytime soon. Shares of the Waterloo (Ont.) company got pummeled again on Oct. 20, dropping 5.21, or more than 8%, to 53.80. The catalyst was a series of bearish research reports from analysts.
It's not hard to play matchmaker for a company whose shares have lost more than 60% of their value since reaching an intraday record of 148.13 in June—only to plunge to a 17-month low of 50.22 in recent days. Peter Misek, an analyst at Canaccord Adams, was quoted in a recent Reuters report as suggesting Microsoft (MSFT) may be interested should the shares fall much further.
An accelerating rivalry with Apple (AAPL) and an economic slowdown that threatens to curb demand for BlackBerrys are contributing to talk of RIM's vulnerability. On Oct. 20, Bindu Benjamin, an analyst at broker First Global, downgraded RIM to "market perform with an under-perform bias" over concerns that heavy spending in the face of competition will eat into profit margins. The same day, Morgan Keegan analyst Tavis McCourt cut his 2009 revenue growth forecast to 84% from 92%, saying RIM faces a tougher economic environment. James Faucette of Pacific Crest Securities issued a note saying sales of the Pearl Flip, one of RIM's most recent phones, have been "tepid at best." Faucette also said sales of another phone, the Curve, have hit speed bumps in Canada and Britain, leaving results for the current quarter "at risk."
The Case for an Offer Can Be Made
The decline in RIM's share price gathered steam after the company said in September that margins would narrow (BusinessWeek.com, 9/26/08) in the coming months.
Further stock price weakness, the theory goes, might elicit a bid from Microsoft, particularly in the wake of its failed pursuit of Yahoo (BusinessWeek.com, 8/1/08). "If RIM's management would be willing to entertain the discussion, and if [RIM executives] are willing to partner up, I think Microsoft would take their call," Misek says, referring to RIM co-CEOs James Balsillie and Mike Lazaridis.
Microsoft has more to gain from RIM in the wireless arena than it did from Yahoo (YHOO) on the Web, Misek argues. "Microsoft has already lost the war over search as currently defined," he says. "It's now at risk for losing the next search war, in the mobile world." RIM's technology makes more efficient use of wireless data networks, and its software works well with Microsoft's enterprise e-mail tools, adding to its allure, Misek says.
A Canadian Icon
As appealing as the hookup may be, there are greater reasons for Microsoft to stay on the sidelines. For starters, unless RIM executives support the idea—and there's no reason to believe they would—Microsoft would have to launch an unwelcome approach that would almost certainly be resisted vigorously. Founders Balsillie and Lazaridis together control more than 12% of RIM shares. "These guys are not sellers and have never really sold any of their shares," says Faucette of Pacific Crest.
There's also the matter of Canadian national pride. Canadians love RIM and would likely rally to its cause if its revered founders opposed a hostile bid. Canadian institutions such as Toronto Dominion Bank (TD) and Royal Bank of Canada (RY) control another 18% of RIM's equity. "You'd be hard-pressed to find shareholders willing to sell a company at $50 that was trading at almost $150 only three months ago," Faucette says.
The deal would be very costly, even for Microsoft, says Richard Windsor of Nomura Securities (NMR) in London. "They'd probably have to pay a 20% premium, which would make it $36 billion, and even massively depressed, that's massively expensive," he says. And while Microsoft has plenty of cash, on Sept. 22 the company committed to buying back as much as $40 billion of its stock.
Will Investors Show Patience?
Representatives of RIM and Microsoft declined to comment on the speculation. Another potential buyer might be Finnish wireless phone giant Nokia (NOK), which has had trouble penetrating the North American market. Still, with only $17 billion in cash, "Nokia couldn't swallow RIM," Windsor says.
What happens to RIM, then? Investors may give management time to turn the stock around. Recent handsets, including the Storm, have met with rave reviews, spurring hope that RIM will fare well this holiday season. But even if sales hold up through yearend, RIM nevertheless faces an economic slump in the new year that's likely to remain a drag on consumer sentiment—and the company's already sagging share price.