Google's bid for Motorola Mobility Holdings proves a lot of things – the value of patents, the advantages of making both hardware and software, the powers of activist investors.
It also proves something else, something more fundamental and important: Just how hard it is for a $10-billion (U.S.) company like Motorola Mobility to compete in an industry dominated by giants worth 20 or 30 times more.
Research In Motion has a similar problem. Despite its problems, it's a fine company and likely on the cusp of an exciting new launch of products. But it won't make it on its own. And just as Motorola's assets were worth more to a big player than they were to investors at large, so are RIM's. In fact, they're worth more than ever, in my view.
In the post-mortem analyses of the Motorola deal, you can read a lot about patent law, Internet-to-TV technology and all sorts of other esoteric things that are hard to wrap your mind around.
For example, Motorola had 17,000 patents and another 7,500 pending. Google paid, according to Sanford Bernstein, the research firm, about $350,000 per patent. You can also read a lot about near-field communications, encrypted security and other geek-speak. Once done, you can apply what you've learned, or tried to learn, to a valuation of RIM.
But there's an easier way. In May,
As the transition from laptops advances, the effects will become apparent in Microsoft's financials. It needs to become a player in smart phones and tablets.
Since that column, a number of things have happened. Microsoft bought Skype for an absurd amount of money, proving that it doesn't always do the rational thing. It also, with Apple, RIM and a handful of other players, bought Nortel's patent portfolio (for about $750,000 per patent), proving that value is in the eye of the beholder. Google bought Motorola, proving that patents are worth a lot.
And, most importantly, Apple's iPhone sales went meteoric. In the latest quarter, they rose 142 per cent, higher than in any other quarter since the third quarter of 2009. Keep in mind that this growth rate was on a much, much higher base. Growth rates usually slow.
Why is this important? Because it likely presages what will happen to tablet sales, and if so, it's an indication of how quickly tablets will start eating into laptop sales. This, in turn, will put tremendous pressure on Microsoft to do something.
And what will it do? It will, according to this theory, buy RIM, which gives it immediate access to smart phone and tablet sales (granted the latter are modest but with heftier sales and marketing, especially in the enterprise world, where Microsoft is strong, it could become a winner).
RIM's next-generation phones are due out in a few months. In the meantime, investors will be wary of the stock because sales could, and probably will, disappoint. But at an enterprise value of about $11-billion (market cap less cash), RIM is trading for less than the price Google paid for Motorola, and RIM, with more than 60 million users, is clearly worth more.
Fabrice Taylor publishes The President's Club investment newsletter, focusing on off-the-radar small to mid-cap companies trading at a discount to net asset value. He can be reached at fabrice.taylor@gmail.com.