Why Facebook Might be Interested in Purchasing Research In Motion

logo_facebook-rgb-7inch2.png.648x0_q90_replace_alpha

It’s always fun to speculate on why one company might be interested in purchasing another. Let me be clear that I do not believe Research In Motion will be purchased. That is so long as BlackBerry 10 is a success.

Seeking Alpha has written a nice article outlining the possible reasons why Facebook might be interested in purchasing RIM. Facebook is looking to gain as much ad platform ground as possible.

Facebook is resolute in its plan to go head to head with Google in the 3rd party intelligent ad arena. By acquiring RIM, it would give Facebook more strength to dominate the mobile device advertising market.

Here’s 5 reasons RIM is a good buy:

1. RIMM’s 3300 US patents

The joint bid between Google (GOOG) and Apple (AAPL) on Kodak’s patents shows that intellectual property remains on everyone’s radar screen. RIMM internally values their patent portfolio at $1 million each for each patent or $3.3billion. FB could license these to Microsoft in the same fashion as the deal the two companies announced earlier this year with the AOL patents. Under this scenario, they could get cash and the Atlas Ad platform in return for the license to Microsoft. Analyst Peter Misek last year put a $2.5 billion value on this portfolio which included the jointly owned Nortel portfolio which RIMM reportedly paid $780 million out of the $4.5 billion paid by the consortium of Apple, EMC, Ericsson, Microsoft, RIMM and Sony. Here is an image, although not updated for 2 years, diagraming a smartphone patent war which shows the significance of the intellectual property landscape:

(click to enlarge)

In a recent jointly filed amicus brief, Facebook, Google and 5 other tech companies argued against vague patent claims being used in infringement cases. The value of intellectual property is certainly on FB’s front burner.

2. Blackberry Messenger

It’s clear there is an assault by private networks like FB to redirect traffic away from cellular phone networks via the internet. This has clear revenue implications for cell phone operators and yields more “stickiness” (hours of users engagement) for FB and loyalty from its user base by lowering their user’s cell phone messaging charges. A quantum leap in this pursuit would be buying RIMM mainly for its Blackberry Messenger network { BBM } private messaging network which recently announced free voice service. BBM is regarded as a secure alternative to SMS messaging. However, it is currently closed to users other than Blackberrys. Facebook could open this to all its users and expand its use exponentially and provide more security for its user base. This security comes from the Blackberry PIN system BBM is built upon. BBM together with RIMM’s undeniably reliable email service has been estimated to be worth $1.6 billion alone.

3. Cash, Fixed Assets, Receivables, No Long Term Debt

RIMM’s 3/3/2012 numbers from their latest available balance sheet (values in 000’s) show total current assets of $7,056,000 and total liabilities, both current and long term of $3,631,000, reveals net assets excluding long term assets of $3,425,000. To be conservative, we subtract inventory and other assets totaling $1,392,000 and end up with $2,033,000. Using a total share count of 516.37 million at $11.69 per share, today’s low as of the writing of this article, the $2.033 billion in cash is less than 1/3 of a $6.036 billion market-cap.

4. Loyal Enterprise Customer Base

FB can get access to RIMM’s loyal enterprise customer base. It reportedly has 70 million overall users with 20 million being business users commanding a dominant enterprise 63% market share. Also, Facebook can launch a credible “Business Class” offering and compete with LinkedIn if it so chooses.

5. Sell Or JV the Hardware Business.

Facebook was rumored to be developing a smartphone but denied the rumor vehemently. This certainly may be a low risk way of exploiting the hardware business without operating it. FB can sell or joint venture the hardware business to Microsoft, Apple or Nokia who want to rid themselves of this competitor. Facebook can embed its apps in these phones as part of the deal. Given all the opportunities the deal presents, the current RIMM share price seems to be a bargain for strategic buyers of their assets.

In some growth markets like Indonesia, RIMM is still a market force. The Indonesian market share, currently 37%, is on the decline, but its still a formidable base for FB to expand its user base with an acquisition of RIMM.

As you can see above, RIMM looks undervalued specifically to a strategic buyer. A strategic buyer could reasonably pay a 20% premium to today’s price and come away with a winner. It also may be attractive to a buyer like Carl Icahn, who saw value in the patent portfolio of Motorola. He successfully split the company into two entities. Motorola Mobility held the patents and was sold to Google. Motorola Solutions, Inc. remains operating today. In addition, the other companies mentioned in this article are all keenly interested in the mobile and patent space and could team up or individually afford to buy RIMM as well.

RIMM’s shareholders should welcome an all-stock offer which would be tax efficient and also give them a play in the FB story as it gathers steam. They would take advantage of the recent spike in their stock and get FB below its IPO price. FB could further expand its float which seems to be what the market likes at the present time. This deal should move through the FTC Hart-Scott-Rodino process quickly because the companies are not competitors.




Leave a Reply