Google/Motorola Deal and Research In Motion

Google GOOG surprised a lot of people by acquiring Motorola Mobility MMI, the pioneer in wireless technologies, which has a long history of innovation in the mobile phone industry. It defined the slim phone design by introducing the StarTAC phones 15 years ago, and reinvigorated itself by introducing the RAZR phones again 7 years later. Unfortunately, its innovation stalled, and was overtaken first by Nokia NOK in cell phones, and then lagged behind badly in SmartPhones designs, until it hopped on the Android wagon to introduce Android based smart phones and tablets. Still, Motorola's past glory was long gone, overshadowed by Apple AAPL and even Samsung in today's hyper-competitive mobile phone industry. As the developer of the open-source Android OS, whereby its success depends on participation of various cell phone manufacturers, Google's acquisition of Motorola Mobility seems puzzling. Google's direct-to-consumer Nexus One phone, also known as the 'Google Phone', was considered a failure, and it also infuriated other manufacturers by introducing direct competition with them. This led to the conclusion by many that Google was acquiring Motorola mainly for its patents, in order to counter the patents assaults from Apple, Oracle ORCL, and many others who want to get a share of the profits in the mobile world. While it remains to be seen how well the marriage of Google and Motorola Mobility will work out, the deal has immediately benefited Research in Motion RIMM, the maker of the popular Blackberry devices as investors now understand that the value of RIMM is not limited to its Blackberry sales, but also its strong portfolio of patents. In a previous article, we had stated that Research In Motion will be a strong acquisition target, most appropriately by IBM IBM, if its stock price keeps falling. With investors focusing on the values of patents, RIMM may very well establish a floor price higher than previously thought. However, while it is tempting to just buy the shares of RIMM, investors should remember that RIMM is still under heavy assault by Apple and Android based phones, and its sales and growth is almost bound to decline until RIMM finds a way to revitalize its devices. Nonetheless, investors should consider selling puts on RIMM as there is certainly a floor price for RIMM before it gets acquired. For example, trading currently at ~$27/share, its December 2011 $17.5 put is selling at ~$0.65/share, giving it a ~3.7% yield, and its January 2012 $17.5 put is selling at ~$0.78/share, giving it a ~4.5% yield. Although these are not doubles or triples, it is certainly enticing in this ultra-low interest rate environment, as long as investors believe that RIMM has a intrinsic value higher than $17.5/share, which we believe will certainly trigger acquisition speculation.