Fill it to the RIM with Microsoft?

By Peter Bernstein April 11, 2012

It seems like a banner day for developments at Research in Motion (RIM). There are three items of note. Unfortunately for the struggling (a term that appears so often in press coverage that it now almost seems part of its name) maker of BlackBerry smartphones, the banners flying have the appearance of being the skull and crossbones. The three are:

  • The rumor that Microsoft may be investing up to $3.5B in the company which equates to roughly 50 percent
  • A research report from Jefferies analyst Peter Misek that concludes the company is losing money on hardware sales
  • Notice that it agreed to repurchase 2 million of its outstanding common shares for cancellation under private agreements with a non-related, third-party financial institution

 Why Microsoft and why now?

Starting at the top, it is important to emphasize that this is very much in the unconfirmed rumor category despite all of the buzz on the Internet that wants to make this a done deal. The rumor stems from the Benzinga finance blog, a wonderful M&A gossip sheet, which cited the typical anonymous sources. It has set off speculation that the play here is Microsoft continuing to beef up its patent portfolio following in just days its purchase of 800 AOL patents. What RIM, who over the years has consistently lost patent lawsuits has that is worth $3.5B is mystery. Another mystery is how this would fit into Microsoft’s plans for leveraging the portfolio of its main smartphone supplier Nokia.

One thing is not a mystery and that is that RIM, despite its stumbles still has the best implementation for secure email on smartphones, and a crumbling but substantial server population in enterprises that is:

  • Coveted by virtually every smartphone maker in the world
  • A nice fit with Microsoft’s lack of a strong play in mobility in general

Add to this new RIM CEO and President Thorsten Heins’ statement of intent to focus a reconstituted RIM intensely on the enterprise business during his recent meeting with financial analysts and the rumor makes more than a bit of sense. It is also worth noting that back on May 3, 2011, Microsoft CEO Steve Balmer, speaking at RIM’s BlackBerry World conference publically stated that his company will “invest uniquely” in RIM which started with RIM picking BING search engine and Microsoft’s mapping capabilities as the defaults on BlackBerry.  

Those enterprise servers are RIM’s true crown jewels, particularly if the findings in the Jefferies report about them losing money on hardware are correct. In fact, it may be that Microsoft is making a rather substantial offer in order to chase off other interested parties like Apple, Samsung (rumored last month to be kicking the RIM tires as a means to spread its bets beyond Android), now in a tablet war with Apple, or even Symantec who is another natural for seeing a lot of value in controlling that critical customer base. 

Why Microsoft and why now? The simple answer is “why not?” How this ultimately plays out will be interesting. 

Losing money on hardware

Misek’s research report took a close look at RIM’s latest form 40-F filing with the SEC and after crunching the numbers was not happy. His conclusion was that after all was said and done, and using numbers based on an adjusted non-GAAP view of the company, it yields a minus 4 percent operating margin number for their hardware operations.   He concludes from this that more inventory write-offs are almost inevitable as RIM’s market share in the U.S. continues to tumble and revenues from hardware sales are on the lower-margin BlackBerry models that remain popular outside of North America.  

On this front, how much more hemorrhaging is likely to occur in the U.S. market remains a fascinating topic. On top of those servers, it seems that in the enterprise, users still like the tactile feel of a typing on a keyboard. BlackBerry still offers the best form factor for doing this along with its security features, and enterprise IT professionals may be loathe to abandon ship and instead will support a variety of smartphones so as not to upset an important user segment. Analysts last year felt that upwards of 30 percent of BlackBerry users in large companies were planning to switch out their devices, but that still leaves 70 percent as well as a window of opportunity if RIM can execute. This again actually plays into the Microsoft interest in the company. 

 Stock buyback

This one was not a surprise. The shares repurchased represented about 0.36 percent of its outstanding common shares at April 5. Combined with the 3.9 million shares that RIM repurchased through the NASDAQ since the start of April. This basically completes a $1.2 billion share buyback plan announced November 5 2009 when RIM stated its intent to repurchase up to 21 million shares, or 3.6 percent of its outstanding common shares.

The repurchase, other than helping give the stock a boost which is hard to separate from the Microsoft rumor in terms of impact, should have no material impact on whatever comes next for the company. Maybe the good news banner to fly here is that company feels it is in sound enough financial shape to be spending money on its stock. This is a small but possibly important symbolic vote of confidence that hopefully can increase company morale. Whether it warms the hard hearts of financial analysts is problematic at best. That said, we all know that checking one’s stocks is an important thing to do on BlackBerry devices, especially if you are a RIM employee.  

Obviously TechZone360 will keep you posted if there is any further news on the Microsoft rumor.

Edited by Jennifer Russell
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