Should You Bet On This Acquisition?

Brian is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

BlackBerry (NASDAQ: BBRY) has soared higher by 11% in the last three days behind news of a special committee being formed at the company. This committee has one job: to seek strategic alternatives, including joint ventures or a sale of the company. But how will this story end?

A Run-Down Of Events

Essentially, 11% has been added to BlackBerry’s stock in anticipation of either a takeover or a partnership. Therefore, we can assume that 11% downside exists if a deal fails to materialize.

We have already seen a great debate on Twitter and other social media outlets of whether or not any company would be interested in acquiring BlackBerry. Adding fuel to the fire was Fairfax Financial’s Prem Watsa resigning from the company’s board to “avoid a conflict of interest.” This news implies that Fairfax is in fact interested in acquiring the company.

Last year the investment firm Silverlake was reportedly interested in acquiring BlackBerry, but AllThingsDigital reported that the firm has no interest in working with Watsa or BlackBerry. Moreover, the NY Post reports that BlackBerry would prefer to be acquired by a “Google-like” buyer, rather than a private equity firm. Following this news, we must wonder which company could acquire it and what BlackBerry brings to the table.

Doubtful Interest

The buyout price targets for BlackBerry range from $10-$15 a share. Before exploring who might show interest, let’s rule out a few companies, and then we’ll tackle the rumors head on.

Google needed a handset manufacturer and patents. Therefore, Google acquired Motorola Mobility. Hence, it is very unlikely that Google shows any interest. Nokia and BlackBerry are similar, but Nokia is larger and probably doesn’t have the cash available. Therefore, I rule them out as well. Some might suggest Microsoft for the handset business, but they partner with Nokia, so I'll rule them out as well. Apple has software, hardware, and its own ecosystem, which I might add is much more valuable than anything that BlackBerry can offer.

So Who’s Left?

With Google, Nokia, Microsoft, and Apple unlikely to show BlackBerry the time of day, you have to start thinking outside the box. The first company that comes to mind is Facebook (NASDAQ: FB).

Facebook has made a couple high-profile and expensive acquisitions (i.e. Instagram). The company definitely has the cash, stock value, and financing available to make such a purchase. Clearly, there is the value of owning a handset maker, but more importantly might be BlackBerry Messenger (BBM).

BlackBerry Messenger is a text messaging service, but is also in the realm of social media, including Voice, Video, and Connected Apps. The benefit is that this service allows for the integration of consumers, businesses, and advertisers to target one another.

BlackBerry bulls, and analysts, have estimated this service to be worth $1.1 billion of revenue per year initially. Some believe that Facebook could integrate such a service with its growing mobile segment, and maximize its revenue potential.

Seeing as how Facebook is driven by ad revenue, this service and the patents associated with BBM could be attractive. With that said, Facebook already has its phone on Android, and by most accounts, it hasn’t gained traction like investors had hoped. Therefore, while this acquisition might work, it would be a bit of a stretch for a company (Facebook) who is actually cutting costs and excelling with its own core advertising business. I view the deal as unlikely.

Next is Amazon (NASDAQ: AMZN). For the last few years we have heard of Amazon’s potential entrance into the smartphone business. The acquisition of BlackBerry would give Amazon the patent portfolio needed to succeed (worth an estimated $2 billion), the hardware business (worth an estimated $2 billion), and the BBM advertising/social media business.

With that said, Amazon is currently rolling out a brand new grocery segment, entering a near $600 billion a year business. With most of Amazon’s resources being used to reinvest in their logistics and launch their grocery business, it is hard to imagine that they try and enter the smartphone space right now.

Then, the only other possible suitors that I can foresee are those who may want the company’s Enterprise System, also called (BES). The value in BlackBerry’s BES is its large enterprise and government customer-base, and that Hewlett-Packard or IBM might be looking to bolster their presence. However, both IBM and HP are already leaders in this space, making it unlikely.

Final Thoughts

As you can see, there are a lot of companies that might wish to acquire a particular service of BlackBerry, but not the entire company.

BlackBerry investors will argue that the $2.9 billion in cash on the company’s balance sheet would make such an acquisition worthwhile to potential suitors. Because after all, BlackBerry has a market capitalization of just $5.8 billion, and this cash position combined with its patent portfolio and the desired segment of the business could be appealing to some.

The problem with this logic is the problems that are realized once a potential acquirer digs beneath the surface. Yes, BlackBerry has nearly $3 billion in cash, but their accrued liabilities, accounts payable, and accounts receivable have continued to rise during the last few quarters.

Therefore, BlackBerry is essentially halting payments to accumulate or maintain cash. Then, you incorporate that its subscription base fell by four million users quarter-over-quarter – BlackBerry is no longer reported such data – and that one of its largest networks in Indonesia is seeing rapid penetration from competitors.

Like I said, 11% of its recent upside is tied to the expectation of a takeover, but for the company to seek such an option tells us that they are low on alternatives. Personally, I can’t see any big name company acquiring BlackBerry. Also, with Silverlake not interested, I think it’ll be a tough deal in the private equity space. Therefore, I wouldn’t chase the prospects of a buyout, and unless we see drastic fundamental changes. I simply wouldn’t invest in this sinking ship. 

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Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends and Facebook. The Motley Fool owns shares of and Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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