With a lot of M&A occurring in the tech sector, I have to put forth the question: Should Microsoft Corp. (NASDAQ: MSFT, Stock Forum) be investigating whether or not to acquire Research in Motion Ltd. (TSX: T.RIM, Stock Forum) and (NASDAQ: RIMM, Stock Forum)? This suggestion may come as a shock to many Canadians as RIM has long been a Canadian corporate sweetheart – one that has helped many wash out the bad taste of Nortel. In my opinion, Microsoft has to seriously consider this deal – it could be a game changer for the mobile world. First, let’s have a look at the performance of RIMM’s stock over the course of the last few months.
At the time of this post, the current market price of RIMM is $44.31USD, giving the company a market cap of roughly $24.48 billion. The candlestick chart posted above is in an almost frightening downtrend. With suffering earnings and current disagreements with foreign governments over privacy, RIMM appears to be at a stage where the brand needs to be repositioned, the product line shrunk, and a return to focus on core competencies must occur. RIMM is currently trading near 52 week lows, has little debt, and is the smart phone of choice for corporations across the world.
As per MSFT’s June 30th 10K filing, the company holds cash, cash equivalents, and short-term securities of roughly $36.79 billion. Their current assets are roughly $29.53 billion more than their current liabilities. Given this spread, and RIMM’s less than $2 billion in short-term liabilities, MSFT does have room on its balance sheet to take on this extra debt (actually, RIMMs net income after taxes from the past operating year was enough to pay off the entire value of their short-term liabilities). With the significant amount of cash (and near-cash equivalents) held by MSFT, coupled with a fantastic credit rating and some room to issue additional equity, an acquisition is a very real possibility.
Even if a wholly cash and equity based acquisition is not possible, it is so cheap to tap the credit markets right now (for instance, IBM’s 3-year issue at 1%), that the additional debt would not cause significant stress to MSFT’s balance sheet. However, one thing that MSFT does lack is a strong position in the market for mobile phones.
As per basic corporate financial theory, Firm A will acquire Firm B such that the total value of the combined firm (denoted Firm AB) is not the dollar value of A + B, but that the value of Firm AB is actually equal to A + B + synergy. Synergy is the main driver behind corporate acquisitions. Consequently, synergy is the reason why MSFT must do this deal. Apple and Google’s Android platform have been making significant gains in the smartphone industry. MSFT and RIMM are industry laggards when it comes to providing competitive products in the consumer sector. The true opportunity in this deal is complete domination of the corporate sector. Windows is still the dominant operating system used in the corporate world. Blackberry is still the dominant smartphone used in the corporate world (and due to slow refreshes in corporate technology, will likely remain so for the time being).
It is not hard to see the attractiveness that a MSFT Blackberry would have for the corporate world. Just for a second, imagine an innovative device with:
- The security and convenience features of the Blackberry Push E-mail Service.
- Blackberry Messenger and other Blackberry-specific features.
- A highly portable, well-designed smart phone.
- Flawless syncing with Microsoft Outlook, Windows Mail, calendar, and address book.
- Flawless media syncing with Windows Media Player and Microsoft Photo Gallery.
- A fully functional Microsoft Office mobile suite.
- (For retail users) Mobile gaming pushed over Xbox Live.
In conclusion, I believe it would be very difficult for Apple and Google to compete with a product such as this, and would widen MSFT’s competitive advantage in the corporate world. With RIMM shares trading at their current level, MSFT must consider the acquisition option at this point in time if they wish to remain competitive in the smartphone world (especially given the failure of their KIN platform). The only remaining question is at what price would RIMM shareholders be willing to accept a takeover?