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Reasons to Doubt Research In Motion's M&A Prospects


As Research In Motion (RIMM) concludes what some speculate may be its last annual meeting with shareholders, there's still a big divergence in what people see as the end game -- and exit value -- for the BlackBerry-maker and its shareholders.

Research In Motion's management is counting on existing handset sales and enterprise revenue to hold together the Canadian smartphone maker through 2012 -- with the prospect that a delayed BlackBerry 10 operating system can revive its earnings and growth prospects in 2013. The financial situation is critical: there were reports on Tuesday that the company was even trying to sell one of its two corporate jets as part of a plan to save $1 billion.

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Recently, RIM chief executive Thorstein Heins reaffirmed the company's plan to launch the BlackBerry 10 in 2013, while rejecting the notion that amid a 95% fall in the company's shares from its 2008 highs, the company is in a 'death spiral.'

Nevertheless, Research In Motion has also hired bankers to pursue strategic alternatives, which many believe could come from a Microsoft (MSFT) or HTC acquisition or a private equity buyout as the company's sub-$4 billion market cap makes it digestible.

In fact, after its worst quarterly loss as a public company in June and another delay to its BlackBerry 10 operating system that's pushed the launch past the 2012 holiday season, many now wonder whether the best hope for a recovery in Research In Motion's shares, which have fallen nearly 50% in 2012, will come from a strategic or private equity acquirer.

At the RIM annual meeting Tuesday, the issue of potential M&A was not publicly discussed.

Research In Motion M&A bulls don't see much value in the company's BlackBerry handset, still a staple of the corporate world and a device which propelled the company to be among Canada's biggest corporations by market cap just a few years ago. Instead, those counting on M&A think that the sum of the company's patent portfolio, its cash assets and enterprise software business are worth than the company's current sub-$8 share price.

"If the stock is selling at working capital, if you look at its patents and its embedded base of customers, you have something is in the range of $20," says Donald Yacktman, the president and co-CIO of money manager Yacktman Asset Management. While Yacktman believes that the company's patents and its roughly 18 million business subscriptions have value, he considers those assets a melting "ice cube" because options are becoming more limited.

Yacktman is Research In Motion's seventh largest shareholder, with nearly 10 million shares as of March 31, according to Securities and Exchange Commission filings. Research In Motion is not among the $17 billion-plus money manager's 25 largest holdings, according to Bloomberg data.

While few analysts expect that Research In Motion could currently fetch a buyout price in the $20 range, they do echo Yacktman's point that expediency will be key to any prospective deal.

"If RIM continues to be run as it is, we believe that the company will eventually fail," wrote Nomura analyst Stuart Jeffrey in a June note to clients that assessed Research In Motion's BlackBerry 10 delays, a large-scale layoff plan and its lower earnings guidance.

In June, the handset maker reported a much wider than anticipated loss for its fiscal first quarter, pushed back the launch of the BlackBerry 10 until the first calendar quarter of 2013, and announced plans to lay off 5,000 employees, roughly 30% of its workforce.

For the three months ended June 2, Research In Motion reported an adjusted loss of $192 million, or $.37 per share, on revenue of $2.81 billion, down 43% from revenue of $4.91 billion in the year-ago equivalent period. Analysts polled by Thomson Reuters expected the beleaguered electronics company to report a loss of $.04 per share on $3.07 billion in revenue this quarter.

In spite of poor results developing software, low hardware margins and cuts to its R&D spending that give Research In Motion's BlackBerry 10 launch a "very low likelihood of success," Jeffrey of Nomura Securities adds that "a change in strategy could, however, liberate significant value from RIM's services business and both tangible and intangible assets."

Yet amid a string of missed opportunities in the smartphone market, including a late start in mobile apps and touchscreens, Research In Motion may be challenged to get a deal done on attractive terms.

The problems are two-fold: Past management, including its co-founders Jim Balsillie and Mike Lazaridis, left the company with its legacy of strategic missteps. Meanwhile, a continued push to develop new BlackBerry phones could deplete the company's assets quickly.

Although RIM's value comes from the 78 million subscribers to its operating system, those potential recurring revenue opportunities in a strategic merger or private equity buyout may be overstated because the bulk of the company's subscriptions are tied to its BlackBerry handsets, which few in the market believe will hold value.

As a result, Cannacord Genuity analyst Michael Walkley wrote in a June note that RIM's operating system subscriber base is limited to its 18 million business customers, who rely on its consistent email platform and security features. That enterprise software unit could run on a competing ecosystem such as Google's (GOOG) Android or Microsoft Windows, if Research In Motion or an acquirer were to turn the business to an open source platform, notes Walkley, who values the unit at $2 billion because of high margins but expected customer losses and price cuts.

"Given our belief RIM's hardware business will struggle to return to profitability given increasing smartphone competition, we struggle to assign any value to the hardware business given our belief the most logical acquirer of RIM would likely attempt to transition RIM's subscriber base to their own competing smartphone products or ecosystem," notes Walkley. In his analysis, the company is worth just above its current sub-$4 billion market cap because of a patent portfolio that may be worth $2.25 billion (plus the $2 billion from the enterprise software unit).

In a best-case scenario, RIM's sum of its parts may not be greater than its whole, or at least not by much.

What about RIM's near-$2 billion in cash and short-term investments? Rapid cash burn is the expectation:

"While RIM has $1.9 billion in cash, we assign zero value to RIM's cash in our sum of parts analysis because RIM's core business is running at an operating loss, and we anticipate RIM's cash balance will decline over the next several quarters," writes Walkley.

As other smartphone makers and tech giants develop new operating systems, such as Windows 8, intended to appeal to businesses going mobile, RIM's dominance in the enterprise market erodes as it burns cash by making BlackBerry phones at a loss.

Donald Yacktman's "melting ice cube" analogy seems apt.

And even if RIM and its bankers, including Royal Bank of Canada, find a potential buyer for the company or pieces of its businesses, investors may be underwhelmed by the price tag. In fact, the $2.25 billion that Walkley views as the majority of RIM's takeout value, is contested by a patent expert.

Alexander Poltorak, chief executive of patent valuation firm General Patent, says that Research In Motion's intellectual property may be worth far less than some expect because it was slow to patent some of the messaging and email technologies that it innovated and which built the appeal of the BlackBerry.

"They were technology smart, but they were patent foolish," says Poltorak, who notes that comparisons between its patents and those of Nortel (NRTLQ) or Motorola Mobility are overstated.

"People who are valuing RIMM patents at billions of dollars should look at Kodak," he says.

Not a pretty picture.

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