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Lenovo Buying RIM Makes Sense, but…

With Research In Motion (NASDAQ:RIMM) approaching the crucial launch of its new BlackBerry10 operating system and all-new BB10 smartphones — devices that are getting pretty good pre-release buzz, by the way — the clamor over splitting the company up or selling it off had largely died down.

Instead, RIMM stock has been on a tear, up 181% since its all-time lows in September. However, news hit on Thursday that had Chinese computer maker Lenovo (PINK:LNVGY) supposedly considering a bid for the Canadian BlackBerry maker. The rumor helped further boost RIMM, which ended up closing at $17.74 on Thursday.

Does the rumor make any sense? Yes and no.

From Lenovo’s side, buying RIM could make sense. The Chinese company has already gone down this path, when it bought the PC unit from IBM (NYSE:IBM) for $1.75 billion in 2005. Lenovo has since done well flogging ThinkPads and has leveraged its purchase to move into second place in worldwide PC sales last year. At the end of the third quarter, Lenovo was just two-tenths of a percent behind No. 1 Hewlett-Packard (NYSE:HPQ) with 15.7% of the world PC market.

As of September, Lenovo had about $3.5 billion in cash, not enough to cover RIM’s $9.3 billion market cap (and premium that would result from a bid), but the world’s second-largest PC maker shouldn’t have trouble financing the purchase.

The BlackBerry is doing better in Asia and Africa than in North America in terms of growth, and Lenovo is also actively targeting emerging markets. It might be able to leverage its own popularity as the second-most popular smartphone vendor in the rapidly growing Chinese market to boost BlackBerry sales there, too — a huge market where RIM has had little success to date.

In fact, this isn’t the first time a Chinese purchaser of RIM has been speculated about. Last year website BuyBuyChina floated the idea that Tencent (PINK:TCEHY), the Chinese Web portal and video-game giant, could make good use of RIM’s BlackBerry Messenger user base for Chinese growth and to expand a global user base.

With PC sales flat-lining and the smartphone market going gangbusters, adding the BlackBerry lineup to its current Android models could bolster Lenovo’s position as a mobile leader and give it models that no one else could match. This would be an advantage over Android phone rivals like Samsung.

Not so fast, though.

While many arguments can be made in support of Lenovo snapping up RIM, it would mean overcoming some high hurdles, mainly in that stagnant North American market, which still accounts for the majority of RIM’s revenue. Then there’s the Canadian government, which could potentially nix any deal.

One of BlackBerry’s strongholds has been in government, where its secure messaging system and encrypted data is highly valued. It’s used by the U.S. military and numerous government organizations. BB10 received FIPS 140-2 certification in November, making it suitable for deployment in any government agency or security-conscious company.

With current tensions between China and the U.S., what are the odds that a Chinese-owned BlackBerry (even if Lenovo is technically headquartered in Hong Kong) would continue to be used by the Pentagon and other government agencies?

Things might be different if Lenovo were to buy only the BlackBerry hardware business (something RIM CEO Thorsten Heins has said he’s willing to consider). In this case, RIM would retain control of the operating system and messaging servers, ensuring that data remained secure. That would go a long way toward alleviating concerns and free Lenovo — which let’s face it, is in the hardware business, not the operating system business — from maintaining BB10.

Both options still face the possible intervention of the Canadian government, though. RIM is (or was) the crown jewel of the country’s high-tech industry. Canada has been facing a series of foreign takeover bids for resource-based outfits like oil company Nexen (TSE:NXY) and Potash (NYSE:POT), leading to some sensitivity and the drafting of new regulations about ownership of strategic resources.

The government has also blocked foreign takeovers of Canadian technology companies based on security concerns. According to the National Post, Canadian Finance Minister Jim Flaherty has said the government would look closely at any Lenovo-RIM deal, while confirming that some Canadian technology is off-limits to overseas buyers.

This is only the latest of the RIM buyout rumors we’ve heard in the past year or two, but it just might be the most plausible one. When Canada’s Minister of Finance comments on it, you know it’s being seriously considered.

However, nothing is going to happen before the BB10 launch at the end of January. RIM will want to see if that goes well enough to signal a possible turnaround. If BB10 flops, Lenovo might find RIM is a bigger bargain than it is now — assuming it can get past all the regulatory blocks that are likely to stand in its way.

 As of this writing, Brad Moon didn’t own any securities mentioned here.

Article printed from InvestorPlace Media,

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