In recent weeks, I think the probability of Google acquiring Research In Motion has gone from almost 0 per cent to somewhere in the ballpark of 50 per cent, and I believe there are three dominant reasons why.
Before I get into my three arguments, I need to mention two things:
1. I have absolutely no knowledge that Google and RIM are even talking to each other. I often meet with people from Google and RIM, and on the occasions that I have brought up my theory, these people have given me feedback to the effect that I am probably crazy and that they would eat their own hat if it would ever happen.
2. I have to give full credit to Kevin Michaluk, founder and editor in chief of the outstanding Crackberry.com blog, who published this article on July 4, awakening my thoughts to the serious idea of Google acquiring RIM.
My initial reaction to the idea was to dismiss it largely based on the antitrust argument. Google needs another Department of Justice investigation just like Obama needs another increase in the unemployment rate. This argument remains valid in principle, but it is mitigated by the relative increase in importance of the other factors. RIM recently fell below $24 (U.S.), is expected to make $5.50 in earnings this year and has $3-billion in cash, making it a very easy buy for Google, even if you assume a monster 100 per cent-plus premium.
The market's recent fall may also cause the feds to pull back their attack dogs in order to allow corporate America to engage in their constitutional right to pursue economic freedom, including merging.
If the feds are going to approve AT&T's $39-billion acquisition of T-Mobile USA, how could they in good conscience block a smaller deal to acquire a company which the pundits are telling us is falling off a cliff?
Here are the three most powerful reasons Google should acquire RIM, right now:
1. Platform convergence
On Sept. 28, 2010, I published an article suggesting that RIM's PlayBook tablet will be running Android apps. This theory of mine was subsequently confirmed by RIM in March 2011, and it will be extended to the QNX-based BlackBerry smart phones some time in "early" 2012, however RIM defines the term "early." RIM looks to launch its Android app compatibility on the PlayBook soon, probably within the next month or two, although delays have been a recent RIM standard practice.
How does RIM do it? In 2010, RIM selected the Texas Instruments OMAP 4400 series chip to be the CPU foundation for its proprietary QNX operating system. On top of this, developers are able to very easily re-purpose their Android apps to run over QNX. Given how easy this is to do, it would be reasonable to believe that the hundreds of thousands of Android apps will run on BlackBerry within months from now.
Here is where is gets extra interesting from Google's standpoint: Based on numerous media reports in recent months, we can now conclude that Google has anointed the same CPU family – the Texas Instruments OMAP 4400 series – to be the reference chassis platform for Android 4.0, aka "Ice Cream Sandwich" or ICS. This goes not only for tablets, but also for the much-more-important smart phones, constituting the vast majority of Android's 550,000 daily activations. ICS 4.0 looks to launch on a small number of initial devices some time around Thanksgiving this year.
Folks, starting by the end of 2011, Android and BlackBerry will be on the same platform, and running the same apps. If this does not get your alarm bells go off, what will?
Yes, this will not gel completely until early 2012, but initial devices from the Google/Android side of equation are scheduled to hit the market by December 2011. You could have understood 50 per cent of this if you had read the Sept. 28, 2010 article, but it will be a lot harder to ignore this within the next six months.
The market certainly hasn't given RIM credit for this. Why shouldn't Google strike before the market wakes up to the significance of this convergence?
For all intents and purposes, despite all other differences, RIM is joining the Android ecosystem in the epic battle against Apple, Microsoft and eventually Google's own Chrome OS. As they said during the Cold War, "There is no such thing as coincidence... ."
2. NFC and Security
Two of the next smart phone frontiers are NFC (Near-Field Communications) and security, and they are often related. Google has launched its NFC initiative with the Nexus S smart phone, working with retail payments in Portland, San Francisco and New York. This is a huge effort and touches on the payments/banking world.
While the NFC opportunity is gigantic – witness the transaction volumes enjoyed by VISA, MasterCard, AmEx and the banking system – it is also an area where security is paramount. Google claims to have resolved any security issues, and surely they have done a lot.
But worries remain. The NFC link itself may have been secured, but if the underlying OS platform has to be 100 per cent trusted. One emerging problem with Android is a consequence of its openness, and that is the emergence of various viruses and other security breaches, including keyloggers and other forms of spyware. NFC may be safe for now, but what if malware takes control of the entire platform?
One key thing that BlackBerry brings to the Android party is a trusted new QNX OS platform that can do a better job than Android in securing against such platform security threats. QNX runs power plants and numerous widgets in the US Department of Defense, among other things.
Some of the most prominent premium car brands put QNX to run automobile systems. The BlackBerry PlayBook recently became the first tablet to obtain the U.S. government's critical FIPS-140 security certification, which can be a requirement for deployment.
What is the bottom line here? Without QNX and BlackBerry's trusted (but closed) platform, Google's ambitions in NFC and related commerce may be for naught. It may have to cede this to Apple's much more secure iOS platform, which may not be as secure as QNX, but sure is more meaningfully secure than Android.
Adding insult to injury, despite Microsoft's horrific security reputation for Windows PC, it has what appears to be an OS in the same class as Apple's iOS for the smart phones: Windows Phone. Google has all the other pieces to win this game, but the weak link is Android's sub-par security. In relation to Google's commerce opportunity that can easily be measured in the many hundreds of billions of dollars, RIM's ex-cash market cap of $10-billion pales.
3. Those patent wars
Recently having flown into focus, several actors including Microsoft, Apple and Oracle have asserted their considerable patent portfolios against Google and/or its Android licensees. I am not remotely qualified to judge the validity of these numerous highly complex claims. What seems clear, however, is that Google may have an increasing appetite for beefing up in this arms race.
For example, IDCC ran up materially a couple of weeks ago based on rumors that Google and Apple may be interested in acquiring said company. Numbers that have been thrown around in the press have been up to $5-billion, or half of RIM's enterprise value.
Everyone knows that Motorola Mobility, Nokia, Broadcom and Qualcomm have some of the largest patent portfolios in the business. That said, RIM also has a respectable patent portfolio, and most people know that RIM has spent considerable amounts over the last decade to develop its own stacks. MMI and Nokia are scraping near the break-even level, while RIM remains hugely profitable, however, so Google would be able to pay a far bigger premium for RIM than any of those other companies.
With RIM's enterprise value near $10-billion, and other patent portfolios going for approximately $5-billion, it would appear RIM is trading at an even more amazing bargain price than first meets the eye.
Conclusion: Who else would join a bidding war?
I don't think the U.S. government – even more so than the Canadian – would allow RIM to be sold to the Chinese, or most any other non-North American company. It's just so sensitive to our national security.
So apart from Google, this leaves only a few companies as potential suitors, in order: HP, Dell, Microsoft and Motorola. Of those, HP has the muscle, Dell has sufficient muscle, Microsoft is highly unpredictable, and Motorola would have to make it more like a merger of equals. I don't think any one of them are as ready right now as Google from a motivation and financial standpoint combined, although they are all possible and should by no means be ruled out.
The platform convergence, NFC, security and patents all point to Google, in my opinion.
Anton Wahlman was a sell-side equity research analyst covering the communications technology industries from 1996 to 2008: UBS 1996-2002, Needham & Company 2002-2006, and ThinkEquity 2006-2008. At the time of publication, this writer was long AAPL, GOOG, QCOM and RIMM.