RIM acquisition 'unlikely': analyst

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BlackBerry maker Research In Motion Ltd. maintains its headquarters in Waterloo, Ontario. Which is where National Bank Financial analyst Kris Thompson believes it will remain despite growing speculation that RIM is now a prime takeover target

Jameson Berkow  Jun 24, 2011 – 11:47 AM ET | Last Updated: Jun 24, 2011 12:01 PM ET

Research In Motion Ltd. is likely to remain Canadian-owned for the foreseeable future in the eyes of at least one analyst.

National Bank Financial analyst Kris Thompson sought to put the BlackBerry buyout rumours to rest on Friday. Not only are the few players with the means to acquire RIM also the ones least likely to do so, he argues, but the Waterloo, Ont.-based company is presently more valuable than its current market capitalization would suggest.

“Our view is that any potential acquirer would be conducting extensive due diligence while waiting to see how RIM’s competitive position transpires over the next several quarters,” Mr. Thompson told clients on Friday.

“A near-term acquisition of RIM is unlikely given the uncertainly in the company’s strategy and ability to execute to plan,” he said, cautioning anyone buying RIM shares on the expectation of a forthcoming sale was using a “risky’ investment thesis.

Only a handful of companies — including Apple Inc., Cisco Systems Inc., Google Inc. and Microsoft Corp. — possess coffers deep enough to buy RIM debt-free, he argues.

Realistically, Mr. Thompson believes only Microsoft would make a suitable suitor. But something would have to happen to Microsoft’s standing agreement with Nokia Corp. before the software giant’s interest would be piqued.

“If [Samsung Electronics Corp.] were to acquire Nokia and abandon the Microsoft relationship, then perhaps Microsoft would turn to RIM,” the analyst said.

Other potential suitors, such as Hewlett Packard Co. or International Business Machines (IBM) Corp., would have to take on debt or equity financing before RIM could enter their price range.

Still, HP just spent US$1.2-billion to acquire failed mobile device maker Palm Inc. last year and while an IBM deal “could make sense,” according to Mr. Thompson, it is still “likely a long shot.”

Recent discussions between National Bank and private equity players suggest there is some appetite among them to put together an offer based on high-yield debt. However, ongoing uncertainty surrounding RIM’s ability to complete what has been a laggard transition to a QNX-based product suite will force them to apply a “massive discount to any cash flow forecast,” Mr. Thompson said.

“So a private equity transaction may also be a stretch.”

Maintaining a US$25 price target and an “Underperform” rating on RIMM stock, the analysts desire to debunk takeover rumours should not be taken as a sign of faith in BlackBerry’s short-term upside potential.

“With RIM currently undergoing selective headcount reduction, employee morale will be affected and the best talent may flee the company, making it even more challenging for the company to execute its plan,” Mr. Thompson said.

“We expect RIM’s competitive position to deteriorate over the near term until the company releases smartphones based on the QNX OS.”

Nonetheless, Mr. Thompson believes the company’s current valuation is higher than it may appear, arguably dissuading potential hostile takeovers even further.

RIM investors have discussed the issue with National Bank, and the conclusion has been a future whereby the BlackBerry commands a niche enterprise business and perhaps a fringe consumer segment. Assuming that business is capable of generating US$1.5-billion in annual cash flow, combined with about US$3-billion in cash and investments and another US$5-billion from RIM’s patent portfolio, back-of-the-envelope math puts the total market value of RIM at about US$23-billion or US$43 per share.

That would represent a 44% premium on the US$15.6-billion RIM was worth as of markets close on Thursday.

As a result: “An acquirer would need to cough up US$20 billion net of RIM’s cash & investments” to tender a realistic buyout offer, Mr. Thompson said.