BlackBerry & Nook: An Accretive Opportunity for this Software Giant?

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BlackBerry (NASDAQ: BBRY) seems to be on the outs with investors again. The shares, after jumping to $18 from $6, fell back sharply when the company recently reported disappointing quarterly results.

Barnes & Noble’s (NYSE: BKS) Nook business seems to be in a worse predicament. After losing $475 million last fiscal year, the CEO recently fled and the company announced it would stop manufacturing the Nook tablet.

Given the news, the pair’s chances for long-term survival don’t look great. But each has some attractive assets that may offer substantial value to the right corporate acquirer. Software giant Microsoft (NASDAQ: MSFT) might just be that buyer.

Microsoft needs devices

Microsoft boss Steve Ballmer has repeatedly said that the company’s future is going to be in “devices and services.” This means he’s looking to build a compelling ecosystem: an environment of mobile devices, software and computer hardware & services in a cloud structure that binds a user to the company.

With an already strong position in the enterprise-computing world, Microsoft could conceivably put a lock on the corporate ecosystem market if it had a well-integrated stable of mobile devices. If recent reports like the company’s talks to purchase smartphone maker Nokia are accurate; Microsoft is already trying to shore up this deficiency.

What Blackberry & Nook have to offer

Blackberry & Nook could help Microsoft fill the void. The original BlackBerry phone was once a staple in the corporate world and its keyboard layout is still very popular. After a lengthy delay, the company finally updated its legacy product with a new keyboard device called Q10. To get traction with a younger crowd it also launched a touch screen Z10 version. Including a new and cheaper Q5 keyboard phone targeted at emerging markets, BlackBerry said it shipped 6.8 million smartphones in the last quarter. Not a bad figure when its core customer is taken into consideration.

The company has always made the business person its key market. But a trend toward employees bringing phones into the workplace stifled demand for BlackBerry’s product and reduced its clout with employers.

To fight back, the firm recently launched a new security solution known as Secure Work Space. This product, even available for devices running on Apple’s iOS and Google’s Android operating system, segregates personal and professional data and applications on mobile devices. It lets the corporation allow employees to use their own device while safeguarding professional data at a minimal cost. An enterprise power player like Microsoft could easily exploit this kind of innovation and a related fairly popular smartphone product line to its advantage.

Barnes & Noble’s Nook unit might also be a nice fit for Microsoft. The business is clearly in trouble, as demonstrated by a 34% drop in device and e-book sales last quarter. The repeated slashing of Nook tablet pricing suggests that things will probably not be getting better anytime soon.

But Nook has some assets Microsoft might find useful. The Nook tablet, by all accounts a workable device, could be a loss-leading entry level partner to Microsoft’s more powerful Surface product. Nook is also a major player in e-books, which account for about 20% of all book sales. T

he brand’s reputation is good in the affluent serious reader market, and still delivers on popular e-book machines like the Nook Simple Touch. Beside e-books, Nook also offers Microsoft a leading place in the growing digital education market. The Nook Study, a textbook reading app, could integrate well with other Microsoft products in the lucrative high school and university student markets.

While Nook’s marketing opportunities are exciting, greater sales gains might be found in BlackBerry’s software subsidiary QNX. QNX has become one of the top developers for the auto industry with around a 60% share in the car infotainment market. Connected cars, those with built-in GPS, blue-tooth, and Wi-Fi, are expected to be a one of the fastest growing trends in mobile communication. While others like Apple, Google and even Microsoft are trying to gain a place in the space, QNX seems to have already made an enviable connection with most major auto makers.

Can BlackBerry and Nook and Microsoft work?

It looks like Microsoft could gain a lot from acquiring BlackBerry and Nook. But will integration be easy? Probably not, but it does seem possible. With proper management and vision, Microsoft should be able to take the best from its disparate collection of assets and assemble them into a compelling ecosystem. Importantly, the company seems to have the staff, around 90,000 talented employees, the time and the money to do it.

The nice thing is that it looks like a very inexpensive gamble. Nook, with all its troubles, can probably be bought out cheaply. Microsoft already owns 17.6% of the business from a $300 million investment about a year ago. It’s likely the rest of the business could be had for not much more.

The purchase of BlackBerry, though significantly more expensive, is also easily affordable for Microsoft, which has over $74 billion in liquid assets and generates over $5 billion in free cash flow a quarter. A fair price for BlackBerry might be around $12 per share based on revenues around $11.0 billion, a net loss of around $200 million, adjusted cash earnings of $790 million and an extremely conservative 8 times multiple. This price, roughly $6.5 billion, could be partially funded by nearly $2.8 billion of BlackBerry’s cash and adding some debt to its pristine balance sheet.

Conclusion

BlackBerry and Nook don’t seem to have much of a future as stand alone businesses, but they do have valuable assets, maybe most useful to Microsoft. The integration of these assets wouldn’t be easy, but their acquisition is quite affordable and could help Microsoft successfully build on its premier position in corporate computing.

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Bob Chandler has no position in any stocks mentioned. The Motley Fool owns shares of Microsoft. 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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