By Michael Tarsala
Research in Motion Limited (NASDAQ:RIMM) shares?spiked?higher last week, following a?Bloomberg News?story suggesting that the company?s enterprise-services unit was drawing buyout interest from International Business Machines Corporation (NYSE:IBM).
That does not necessarily mean that any buyout would come at a large premium, explains Barry Randall, manager of the?Crabtree Technology?long-only investment model.
RIM selling its Enterprise Services unit to IBM would be, ?like an organ donor giving up his heart while he was still alive,? Randall says.
Still, it may be RIM?s best option. Randall:
With RIM?s?(NASDAQ:RIMM)?current lineup of smartphones finding little traction in the marketplace, at least compared with Apple (NASDAQ:AAPL) and Google?(NASDAQ:GOOG)?Android, RIM?s Enterprise Services is essentially the only thing of lasting and salable value.
If?IBM?is trying to buy it, it is essentially saying to RIM that they want RIM to do the dirty work of separating Enterprise Services from RIM?s handset business, rather than buying RIM in its entirety and performing that surgery themselves.
Whatever value still exists at RIM needs to be extracted sooner, rather than later.
?Later,? in this case, is early 2013, when RIM expects handsets based on Version 10 of its BlackBerry OS to be released. As Nokia?(NYSE:NOK)?has learned, relevance is fleeting, and even if BlackBerry 10 is a great product, it will be trying to take share back from the likes of Apple,?Samsung, Motorola, HTC, and a dozen other players.
Impossible? No. Unlikely, yes.
IBM?s business model is built around manufacturing earnings, not hardware, Randall says.
The company?s main focus is:
- Buying technology owned by smaller companies
- Selling that technology across its immense sales apparatus
- Generating cash flow
- Spending that cash on share buybacks
- Buying technology owned by smaller companies
So buying RIM?s enterprise division makes sense for IBM. It would fit with the company?s services-first business model.
It may also work for Research In Motion shareholders, extracting some value now and avoiding potential for a continued stock price slide, he says.
?IBM is just trying to get RIM to perform the messy surgery themselves,? Randall says. ?And RIM ought to do so.?
The above article comes from?Covestor.
Covestor Ltd. is a registered investment advisor. Covestor licenses investment strategies from its Model Managers to establish investment models. The commentary here is provided as general and impersonal information and should not be construed as recommendations or advice. Information from Model Managers and third-party sources deemed to be reliable but not guaranteed. Past performance is no guarantee of future results. Transaction histories for Covestor models available upon request. Additional important disclosures available at?http://site.covestor.com/help/disclosures. For information about Covestor and its services, go to?http://covestor.com?or contact Covestor Client Services at (866) 825-3005, x703.
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