M&As set for bumper year

The biggest wave of deals for mobile-phone assets in more than a decade may help Research In Motion Ltd.’s shareholders almost double their money in a sale.

 

Led by Google Inc.’s takeover of Motorola Mobility Holdings Inc. and Nortel Networks’ patent auction, acquisitions of wireless and telecommunications equipment makers may top $27 billion (€18.6 billion) this year and approach the record in 1999, according to data compiled by Bloomberg. After Google agreed this month to pay a dot-com era premium for Motorola and its patents, RIM, maker of the BlackBerry, may now be worth almost $25 billion, an estimate from Morgan Keegan & Co. showed. The shares surged as much as 8.1 percent today.

 

Once valued at $83 billion, RIM fell 83 percent through yesterday as Apple Inc.’s iPhone and Google’s Android platform lured away smartphone customers. With Google gaining Motorola’s handset business, RIM may now attract interest from Samsung Electronics Co. and Microsoft Corp., Stewart Capital said. A buyer would get a smartphone maker that is still dominant among corporate clients, runs its own operating system and offers greater security with its own e-mail servers. Paying twice RIM’s value of $13.5 billion would still be a discount to rivals.

 

“It gives a potential acquirer scale and share in a market that’s rapidly being dominated by Google and Apple,” said Malcolm Polley, who oversees $1 billion as chief investment officer at Stewart Capital in Indiana, Pennsylvania. Buying RIM makes sense for Samsung because “Google all of a sudden has become a competitor,” he said.

 

“It might be valuable for someone like Microsoft that’s trying to make inroads into the handheld space,” he said.

 

Titus Kim, a spokesman at Suwon, South Korea-based Samsung, declined to comment on whether it would consider buying RIM.

 

Peter Wootton, a spokesman for Redmond, Washington-based Microsoft, said the company doesn’t comment on rumor or speculation. Marisa Conway, a spokeswoman at Waterloo, Ontario- based RIM, also said it doesn’t comment on rumor or speculation.

 

RIM’s shares rose 3.6 percent to $26.69 after climbing as high as $27.85. The gain was the third largest in the Nasdaq-100 Index even as U.S. stocks fell for a fourth straight week.

 

Since peaking in June 2008, RIM’s market value plummeted almost $70 billion through yesterday. The decline in the stock is the biggest among communications-equipment providers worth at least $10 billion, data compiled by Bloomberg show.

 

Over the same span, Cupertino, California-based Apple has doubled to become the world’s second-largest company with a market capitalization of $339 billion, the data show.

 

RIM, which introduced a new lineup of BlackBerry phones this month, a year after its last new devices, is losing out as consumers spurn its aging models for iPhones and handsets running Android software.

Cheaper Android phones are also making inroads in Latin America, Asia and Europe, threatening the popularity of RIM’s less expensive BlackBerry models such as the Curve.

 

RIM’s share of the global smartphone market fell to 12 percent in the second quarter from 19 percent a year earlier, according to Gartner Inc. Google’s Android became the leading mobile-phone operating system in the same period, rising to 43 percent, while Apple climbed to 18 percent.

 

About two years ago, RIM controlled more than half the North American market, according to Sanford C. Bernstein & Co.

 

While Jim Balsillie and Mike Lazaridis, RIM’s co-chief executive officers, said in June that their commitment to RIM is “stronger than ever,” Mountain View, California-based Google’s $12.5 billion deal for Motorola may bolster RIM’s value to potential bidders.

 

Google agreed to buy Motorola for $40 a share, or 73 percent more than the Libertyville, Illinois-based company’s 20- day trading average, data compiled by Bloomberg show. That’s the highest premium for a wireless-equipment takeover greater than $500 million since 1999, the data show.

 

A group led by Apple paid $4.5 billion for Nortel’s patents in June. The auction ended after 19 rounds with a price that was five times more than Google’s bid before the process began.

 

With wireless technologies becoming more complex and smartphone sales forecast to double by 2015, takeovers and asset sales in the industry have increased as handset makers try to gain leverage over their competitors.

 

The value of deals in the wireless and telecommunications equipment industry is on pace to reach the highest level since $30.2 billion in transactions were announced in 1999, according to data compiled by Bloomberg. Based on the implied revenue multiple Google paid for Motorola’s smartphone business, RIM could be worth $47 a share, or an 82 percent premium, said Tavis McCourt, an analyst at Morgan Keegan in Nashville, Tennessee.

 

William Blair & Co.’s Anil Doradla says RIM could get even more in a takeover because of the Google-Motorola deal.

 

“Giving RIM even a 100 percent premium over the market cap shouldn’t be too much of a problem,” Doradla, an analyst in Chicago, said in a telephone interview.

 

At $52 a share, about double RIM’s price yesterday, the company would be valued at more than $27 billion, data compiled by Bloomberg show. At that level, RIM would sell for 10.2 times next year’s earnings, less than the average communications equipment provider, which trades at 11 times profit.

 

RIM’s patents alone could be worth as much as $5 billion, based on what Apple and Google each paid for patents owned by Nortel and Motorola, respectively, according to Shaw Wu, an analyst at Sterne Agee & Leach Inc. in San Francisco.

 

“It’s got to the point that you have two titans” in Apple and Google, he said in a telephone interview. RIM is “almost fighting the impossible war. The best outcome for RIM shareholders is to get acquired,” he said.

 

Analysts at Morgan Keegan, William Blair and Detwiler Fenton & Co. say that Samsung, the maker of Galaxy smartphones, would be the company most likely to buy RIM.

 

Samsung, which has struggled to sell handsets based on its own software, uses Google’s Android platform in its mobile phones.

 

The Google-Motorola deal may increase Samsung’s concern Google will become a competitor in the handset business and give Motorola earlier access to the newest Android technology, according to Morgan Keegan’s McCourt.

 

“The only way to get you out of this game of being completely beholden to operating system vendors is to own your own operating system,” he said. “There is only one company in the world left that has its own operating system with enough users to be relevant and that’s RIM.”

 

Microsoft, the world’s largest software maker, could buy RIM to build its smartphone share and gain a device to complement its Windows Phone 7 platform, said Paul Taylor, Toronto-based chief investment officer at BMO Harris Private Banking, which oversees $14.5 billion and owns RIM shares.

 

Microsoft’s share of mobile operating systems fell more than half to 1.6 percent in the second quarter from 4.9 percent a year earlier, according to Gartner. The slump came after Microsoft already failed with its Kin smartphone, scrapping the model last year after less than two months on the market.

 

“It would make sense for Microsoft if they want to really move their operating system forward,” Michael Yoshikami, chief executive officer and founder of YCMNet Advisors, which manages $1.1 billion in Walnut Creek, California, said in a telephone interview. “Windows 7 is losing market share.”

 

Still, Matt McCormick, a money manager at Cincinnati-based Bahl & Gaynor Inc., which oversees $4 billion, said buyers may not be willing to pay a significant premium for RIM.

 

“The real variable is what are you getting and what are you paying for it,” he said in a telephone interview. “You could see someone like a Samsung or Microsoft take a look at it, but if you equate it to housing -- you have a mansion that’s come under disrepair in a neighborhood that’s very volatile.”

 

“If RIM is going to sell, it’s because they’re feeling forced to do it and those sales never go well for the seller,” McCormick said.

Microsoft also has a partnership to provide Espoo, Finland- based Nokia Oyj, the world’s biggest maker of mobile phones by volume, with its Window Phone 7 software. That makes it unlikely Microsoft would buy RIM, according to Stephen Patel, an analyst at Gleacher & Co. in San Francisco.

 

Any takeover may need the approval of Canadian regulators. Prime Minister Stephen Harper’s government in November rejected Melbourne-based BHP Billiton Ltd.’s $40 billion hostile takeover of Saskatoon, Saskatchewan-based Potash Corp. of Saskatchewan after the province said the sale would cut jobs and tax revenue.

 

RIM’s co-CEOs are also the company’s biggest shareholders, with Balsillie holding a 5.9 percent stake and Lazaridis controlling 5.4 percent, data compiled by Bloomberg show.

“Our commitment to RIM is stronger than ever and we know what we have to do jointly to accomplish and take RIM to the next stage of growth and success,” Lazaridis said on a June conference call. “While I can’t promise that there won’t be bumps in the road ahead, I can assure you that Jim and I have never been more committed to the business and that our interests remain closely aligned with those of our shareholders.”

 

Lazaridis, who invented the BlackBerry to handle mobile e- mail, has shared the role of CEO with Balsillie since 1992. They are also both co-chairmen of RIM.

 

For Ronald Gruia, an analyst at Frost & Sullivan, RIM still makes for an attractive takeover target.

 

“Maybe you could do a better omelet with the ingredients RIM has,” he said in a telephone interview. “They are still a player to beat in the enterprise.”