Trade Update RIMM: What Does AOL’s Patent Play Mean for RIMM’s Sum of the Parts Valuation?

by Dan April 9, 2012 10:13 am • Commentary

Trade Update April 9th, 2012: Since putting on the Jan13 “take-out” trade (below) following RIMM‘s disappointing Q4 earnings last month, the stock is down about 8.5% on the rumor-mill suggesting that potential suitors are generally indifferent to the company and their assets.  I have no opinion one way or the other on that, as I stated on Options Action and in the post, the trade below is not predicated on a fundamental turnaround of this company on their own (they are screwed as a stand alone), but the risk reward of owning some premium for a low probability take-out makes some sense given the viciousness of the current smartphone landscape.

GOOG paid up for MMI’s patent portfolio, MSFT has licensed NOK’s and the real question is what is RIMM’s worth, and to who?  What has become obvious to me over the last few years when it relates to IP u never know who will pay what, and often times investors are the last to know these answers.  Patents are not the whole story, or even a large part of it, when looking at the sum of the parts for RIMM, I am sure some lagging smartphone competitor could see some value in their installed user base in the enterprise and look to convert their consumer users to a pre-existing OS…..BUT with AOL up this morning more than 40% on a patent deal with MSFT, the question of what RIMM’s patents are worth could be one that we hear more and more by activist investors.

I am going to add to this position, but slightly alter it given the stocks recent decline:  

Trade: RIMM ($13.05) Bought the Jan13 20 / 25 Call Spread for .47

-Bought Jan13 20 call for .83

-Sold the Jan13 25 call at .36

Break-Even on Jan13 Expiration:

Profits btwn 20.47 and 25 make up to 4.53, max gain of 4.53 at 25 or above

Losses of up to .47 btwn 20 and 20.47 with max loss of .47 below 20.00

RATIONALE: I guess my point here is that RIMM has a $6.9bil market cap with $1.775 bill in cash, and no debt, the big fear if you are long is that these guys start burning cash and go into a death spiral, so if they were able to a deal similar to AOL for cash, it could give them a HUGE financial cushion and make it that much more interesting to potential acquirers.  Either way if they were able to monetize their patents and have 50% of their market cap in cash, all sorts of investors would be swarming around the stock.


Original Post March 30th 2012:

Here is a preview of what I will be discussing tonight on Options Action on CNBC at 5pm est:

RIMM reported a much anticipated fiscal Q4 last night that missed fairly dour expectations and stated that they will not be offering “quantitative” guidance anymore, rather it will be more “qualitative”.  Sounds a bit fishy to me, when investors and Wall Street are most skeptical, the new management decides to be less transparent.

I am not gonna go into great detail on the quarter and the new strategy, Barron’s did a fairly decent wrap of the conference call here , but I guess one of the only reasons you would buy the stock here is if you felt that new CEO Heins comment that “it would be Prudent to explore all options” means that they are open to a sale.  Details of potential partnerships remain vague, and the following comment from the CEO in the press release doesn’t shed a whole heck of a lot of light on what could be in store, “We are undertaking a comprehensive review of strategic opportunities including partnerships and joint ventures, licensing, and other ways to leverage RIM’s assets and maximize value for our stakeholders.”

The stock is ACTIVIST BAIT, recently 13f filings revealed that David Einhorn’s Greenlight Capital took a close to 3 million share stake in the company.  When we get Q1 13f disclosures in mid May, I would expect to see increased Hedge Fund ownership, and I would assume that most activist investors think there is a sense of urgency here, even if it doesn’t appear that management does.  I also think there is a very good chance that this situation resolves itself sometime in the second half of 2012, with the company being forced into a deal by activist investors, not the friendly Canadian kind, But rip your face off Third Point Capital kind.

I am not sure in the near term there is a ton of downside as investors wait for new phones based on the companies new operating systems, but I do think this stock could languish until investors start to make some noise.  But once the news starts in earnest, the stock could very well be back in the high teens.  With a $7.5 billion market cap, and $1.7billion in cash, this is not exactly a hard acquisition for most competitors looking to leap frog peers in the smartphone space in a market share game. Remember that GOOG paid $12.5b for MMI (ex their $3.5b cash), now this was primarily for MMI’s patent portfolio, but if anyone could place a value on some of RIMM’s hard fought parents from last decade then maybe the thing looks that much cheaper.  Business Insider had a nice little rundown today of some prospective buyers (here).

In my years in this business, AAPL is really the only end market tech company that I have seen turn things around from the brink, and given RIMM”s history of lack of innovation I wouldn’t place any serious bet on a turnaround any time soon.  The company’s value will be in what a larger competitor can squeeze our of them, not for them to create an iPhone killer.

In my normal sort of contrarian way, I would much rather play for a takeout then a meltdown, it’s just more fun at this point.  I wouldn’t exactly buy the stock but I like the risk/reward of an out of the money call spread that would place a purchase price in the mid to high 20s.

TRADE: RIMM 14.33 Bought the Jan13 20 / 27.50 Call Spread for .75

-Bought 1 Jan 20 Call for 1.08

-Sold 1 Jan 27.50 Call at .33

Break-Even on Jan13 Expiration:

Profits btwn 20.75 and 27.50 make up to 6.75, max gain of 6.75 above 27.50

Losses of up to .75 btwn 20.00 and 20.75, with max loss of .75, 20.00 or below


Technically the chart is like a coiled spring, and the least bit of Good news and I think you have a stock in the high teens and then you would probably see a take out value of somewhere near $15billion, which would put the stock near $27.50

1 YR RIMM Chart from Bloomberg


Sanford Bernstein analyst Pierre Feragu (rates the stock Neutral with $12 target) made the following arguments about the value of the company’s asset to the right buyer in a note to clients dated March 13th:

RIM’s 75m users are worth more than the company’s market capitalisation. RIM is currently valued at only ~$90 per user- less than half HTC’s ~$280 per user. Many companies could see substantial value in this asset. As a couple of illustrations only, without expressing any opinion on the likelihood of such moves, a Microsoft could consider such an acquisition and invest another few hundreds of dollars per user in offering replacement phones based on their operating system, retaining the Blackberry email experience and the popular BBM service. This would potentially quintuple Window’s current smartphone user base.

RIM’s market share would be a king maker in the consolidation of the smartphone space. A number of smartphone players could see RIM’s current market share as a key strategic asset. Not only is RIM in command of 11% of shipments, or almost half the market leader, but also RIM has an even larger share of users, having been in the business for much longer than most competitors. Moreover, RIM’s user base is of very high quality with a dominant share of corporate users. Microsoft could see RIM’s 10% share as a bridgehead from which to attack the rest of the smartphone market. HTC could add RIM’s 10% onto its existing 11% share, quickly reaching the scale of Samsung and Apple. Any of the latter two could leapfrog its closest contender with such an acquisition

A “buy an upgrade” acquisition is eminently viable. An acquisition by a trade buyer with an existing smartphone platform makes a lot of sense to us. We estimate a trade buyer would extract $18bn of value from the acquisition, cumulating a decent IP portfolio, the cash cow of existing service fees and the strategic value of RIM’s user base. This is a 100% premium to the recent stock price. Although we see this as a clear upside risk, we don’t see any likely contender yet. Microsoft has often expressed unease with the idea of investing into hardware; Apple and Samsung are likely too busy managing their ongoing success and HTC wouldn’t have the financial strength to carry out such an operation. Time is of essence as well. All 3 assets will see their value decline rapidly over time. IP valuations are likely to come down, as the “Patent Wars” settles, RIM’s service revenues are likely to shrink rapidly, as the company’s user base decreases. This is the reason why we do not recommend investors to buy RIM as a long term value play.