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As RIM sinks, a takeover-in-waiting?

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A day after Research In Motion Ltd. (RIM-T) announced it will probably post an operating loss when it releases its next set of quarterly numbers in late June, analysts are trying to find new ways to describe just how much of a mess the company is in.

RIM (RIMM-Q) shares, which had once touched a high of more than $140 US in 2008, opened trading on Wednesday flirting with single digits. On the Nasdaq, RIM shares were down about 9 percent, leaving the stock price at about $10.20.

In addition to forecasting a likely operating loss, RIM also announced it has hired bankers to assist it with its "strategic review." Many analysts took the announcement to mean that RIM is now an acquisition-in-waiting.

Colin Gillis, senior technology analyst at BGC Financial, said RIM likely has three choices to pick from: sell the company, split it up or downsize severely and focus on a niche market.

Gillis said a company looking to enter the smartphone market may be interested in acquiring RIM because the BlackBerry-maker's patent portfolio would help counter the threat of intellectual property lawsuits. But he pointed out that, at an estimated $9-billion price tag, RIM would be a huge purchase - larger than Microsoft's $8.5-billion acquisition of Skype last year, which was Microsoft's biggest purchase ever.

"For $9 billion, you can hire a lot of programmers," he said.

Buying RIM is also complicated by the fact that the company's 52-week high share price is more than quadruple its current price. That means investors could accuse the company of selling too cheap if it goes at a price close to its current one.

Instead, Gillis said, the company could wait until its share price stabilized somewhat. But in the lead-up to the launch of RIM's new line of phones, dubbed BlackBerry 10, later this year, the company is caught in a vicious tug-of-war between volume and margins, Gillis added.

If RIM focuses on maintaining margins, it risks losing volume and further eroding market share, he said, because many consumers are no longer interested in buying BlackBerrys at current prices. Losing volume ahead of the BlackBerry 10 launch would be a disaster because app developers are less likely to develop software for a smartphone platform with fewer users.

RIM could try to maintain volume by slashing margins, Gillis said. But then it wipes out any potential profit from selling its devices.

Gillis was far from the only analyst issuing severely pessimistic forecasts for the BlackBerry-maker. Indeed, it was difficult to find anyone who believes RIM's long-promised turnaround is going to happen.

Analysts have now almost fully rejected RIM's claim, which the company has been making since last year, that the upcoming launch of a new line of BlackBerrys will prove to be the catalyst that sparks a turnaround.

"While RIM management anticipates BlackBerry 10 smartphones will reverse its struggling business, we believe BB10 smartphones will launch into a competitive smartphone market," wrote Canaccord Genuity technology analyst Michael Walkley. "In fact, we doubt [the new BlackBerrys] will materially close the competitive gap versus a new iPhone 5, new Android smartphones, and improving Windows smartphones."

RBC Capital Markets analyst Mark Sue now estimates that RIM, which essentially invented the smartphone, risks seeing its share of the smartphone market drop below 5 percent.

"In our view, below 5 percent share is the realm of subscale operations, razor thin profits, and decreasing odds of a turnaround," Sue said in a note.

In the wake of the latest bit of terrible news from the BlackBerry-maker, some analysts are now convinced the only turnaround will come with a partial or full sale of the company.

"Room for manoeuvre of the company is shrinking fast, which may accelerate a change in direction, towards a sale or a change of strategy that would leverage well RIM's assets (user base, email and messaging-centric low cost and high quality user experience)," wrote Bernstein Research analyst Pierre Ferragu.

"We nevertheless wouldn't recommend investors to buy the name yet, as the Blackberry 10 launch will most likely turn into a disaster."

National Bank analyst Kris Thompson also told his clients he now believes RIM is for sale, and that the stock might be worth betting on at a level below $10 a share on the hopes it might be acquired.

Still, he said buying RIM shares on the likelihood the company may be bought is "like going to a casino."

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