Rumors We Would Like To Hear: HTC To Buy RIM

Taiwan smartphone company HTC has an annual revenue run rate of close to $20 billion and it is currently growing at a rate of about 100% a year. HTC will ship 60 million handsets, at least, in 2011. HTC’s success is based largely on Google (NASDAQ: GOOG) Android-based smartphones which include the Thunderbolt, the Inspire 4G, and the Incredible S. HTC is also early to the market with 4G devices. That may have appeared to have been a gamble a few months ago, but AT&T Wireless and Verizon Wireless have started to aggressively enter this ultra-fast wireless market. Other large nations have started similar roll-outs of 4G. That is certain to push up demand for HTC products.

HTC’s success has been so significant that its market capitalization recently passed that of the world’s largest handset company–Nokia (NYSE: NOK). HTC’s total value approached $30 billion last week.

Research In Motion (NASDAQ: RIMM), the bumbling smartphone company, has been in trouble for a year now. The Apple (NASDAQ: AAPL) iPhone has take much of RIM’s consumer base. RIM’s consumer products are relatively new. It has relied on the corporate and enterprise markets which favored its Blackberry e-mail device for years. Apple and Android smartphones are now encroaching on the RIM stronghold. RIM’s earnings growth has slowed and its global market share has collapsed. In April, RIM revised its earnings for the current quarter down below $5.2 billion to $5.6 billion range it previously predicted, and it said unit sales would be below 14 million units

New Comscore research shows that Android’s market share in the US is 36.4%, up 4 points from two months ago. Apple’s is flat over the period at 26%. RIM has dropped to third place with a market share of 25.7% down 4.7 points. That free fall is likely to continue.

Rumored buyers or merger candidates for RIM have included Microsoft (NASDAQ: MSFT), Samsung, and Nokia (NYSE: NOK). There is some sense to each. Microsoft’s Window’s mobile operating system lags all of its major competitors in market share. RIM’s share is still significant despite its drop. Microsoft would eventually eliminate the RIM operating system after a buyout. It is important for Microsoft to have Windows on smartphones as a means to distribute its other software and search products. That is unique to Microsoft. Blackberry and Apple have concentrated on distributing applications ahead of work solutions like those that are part of the Windows suite and Bing.

Nokia is so far behind in the smartphone race that many analysts believe it has no chance to gain lost ground, even with its new Windows distribution deal with Microsoft. Nokia recently revised down its earnings as RIM did two months ago. The Blackberry would be a product that could get Nokia immediate market share, particularly in the enterprise sector. RIM’S market cap is $20 billion, so a deal with Nokia would likely be a merger of equals.

Samsung is the second  largest manufacturers of handsets in the world, after Nokia. Samsung could also use RIM’s presence in the corporate market to increase its smartphone market share. That makes Samsung one of the two most logical buyers of RIM.

HTC is growing much faster than Samsung, and has a limited amount of time to make a transaction if it want to move its global market share ahead of Apple and Samsung immediately. RIM already has a presence in the tablet PC market with its Playbook device. RIM continues to have a strong hold on the corporate market–one that it may take years for HTC to equal. In the race for RIM’s market HTC still has the challenge of beating Apple. A buyout of RIM would give it a clear lead in the enterprise sector.

One of the primary objections to a purchase of RIM is that it has a proprietary operating system, unlike open source Android. There is no reason to believe that one company with products that run two operating systems cannot be successful, particularly if each is aimed at its own target market. Android is flexible enough so that it can probably be programmed over time to mimic much of what the Blackberry OS offers. That would allow the Blackberry software platform to be expendable sometime in the future.

HTC’s success leaves it with the options of organic growth, which puts it in a long-term struggle with Apple, RIM, and Samsung, or the chance to make itself the second largest handset company in the word.

Douglas A. McIntyre