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RIM in Play?

Richard Croft
April 21, 2012
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4 minutes read
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Having lost some 75% of its share value over the past year, could it be that Waterloo, Ontario-based Research-in-Motion Ltd. (TSX: RIM Fridays close $13.26) is at last in play? If so, it should not come as any major surprise as frankly, in the shark-infested waters of the high-tech world (worse, even, than the predatory world of mining), RIM’s days have been numbered since its twin fiascos with its tablet launch and revamped operating system.

Senior management that took its eyes off the ball while pursuing hockey teams and university research school naming rights didn’t help. Market share for the company’s iconic BlackBerry smartphone eroded sharply in the face of persistent attacks by phones carrying Google’s Android operating system and Apple’s iPhone.

And now it appears RIM is in play. The company has been actively shopping for financial advisors to help it choose “strategic options” – typically a euphemism for selling part or all of the company. JP Morgan Chase & Co. is now reported to be a front-runner.

So what happens if the company is in play? A takeover does not appear likely as we are witnessing a company with a declining subscriber base, revenue base and market share. On the other hand, RIM has a pristine balance sheet including a $1.7 billion cash hoard, but those are not necessarily attractive in a tech takeover.

What makes more sense is a licensing deal to take advantage of RIM’s still-valuable proprietary BlackBerry technology, networks, and patents. That might attract the interest of, say, Microsoft Corp. or Samsung, looking to find a way to compete with the Goliath Google Inc. and the ever-ripening Apple Corp. Mind you there are a lot of questions as to just how valuable these assets are. Considering that RIM on its own is not having much success competing with Google and Apple.

Still, if there is interest it could light a fire under RIM stock which seems to have leveled off around $13. If a bidding war erupts – which is far from certain – it could happen sooner rather than later and that would light a fire under RIM call options.

If you are interested in playing the RIM sweepstakes you can do it from two perspectives. The first strategy is to simply buy six month out-of-the-money call options to take advantage of a potential licensing deal. This strategy would appeal to the most aggressive trader looking for a short term windfall with limited risk. The RIM Sept 15 calls at $1.30 look interesting.

Another approach is an at-the-money covered call strategy. This strategy hinges on whether you believe that RIM has support at this price point and that a licensing deal is probable. If no deal surfaces, the shares of RIM will continue their downward path making it feel like death by a thousand pin pricks.

With the covered call, you would buy the shares and write the June 13 calls at $1.25. The sale of the calls provides downside protection to $12.01 per share. The in-the-money covered call would return 8.2% over eight weeks if the stock stays the same or rises. Not bad for a conservative investor who believes the short term downside is limited with the shares being supported by the notion the company is “in play.”

Richard Croft
Richard Croft http://www.croftgroup.com/

President, CIO & Portfolio Manager

Croft Financial Group

Richard Croft has been in the securities business since 1975. Since February 1993, Mr. Croft has been licensed as an investment counselor/portfolio manager, operating under the corporate name R. N. Croft Financial Group Inc. Richard has written extensively on utilizing individual stocks, mutual funds and exchangetraded funds within a portfolio model. His work includes nine books and thousands of articles and commentaries for Canada’s largest media channels. In 1998, Richard co‐developed three FPX Indexes geared to average Canadian investors for the National Post. In 2004, he extended that concept to include three RealWorld portfolio indexes, which demonstrate the performance of the FPX portfolio indexes adjusted for real-world costs. He also developed two option writing indexes for the Montreal Exchange, and developed the FundLine methodology, which is a graphic interpretation of portfolio diversification. Richard has also developed a Manager Value Added Index for rating the performance of fund managers on a risk adjusted basis relative to a benchmark. And In 1999, he co-developed a portfolio management system for Charles Schwab Canada. As global portfolio manager who focuses on risk-adjusted performance. Richard believes that performance is not just about return, it is about how that return was achieved.

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