Could a Spin-Off be in RIM's Future?
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The famous Canadian phone and tech producer Research In Motion (NASDAQ: BBRY) is having trouble finding traction in an incredibly competitive market. And that's putting it lightly. The company is preparing for yet another subpar year and, barring an acquisition or sell-off, is positioned for a quick exit from the market. While I recommend selling RIM, there are interesting implications for a buy-out or split.
The company reported earnings per share of $6.30 for 2011, but the Street's earnings per share estimates for 2012 are at around $2.30. Earnings will continue to fall next year. The company's price/tangible book is coming in at 0.80, which, given the present state of the business, indicates that RIM is not looking for investors. It's looking for liquidators.
Given reports on June 25, it might be looking for potential buyers. Facebook (NASDAQ: FB) and Amazon.com (NASDAQ: AMZN) might be making bids to buy the handset division - interesting strategic moves for either company. For Facebook, this would signal its entry into the hardware wars; the social utility mogul has the intellectual and social capital that Research In Motion presently lacks. The messaging and email business might also split off, with prospective buyers such as Apple (NASDAQ: AAPL) and Google (GOOG). This would help either business as it looks to build state-of-the-art tablets that receive data dynamically and continuously.
Preparing the Fire Pit
Research In Motion is presently cutting jobs - around 3,000 - in order to help it eliminate over $1 billion in operating expenses. The total share price for Research In Motion has fallen 26% since the beginning of the year. The company has relied, in large part, on its email push delivery system and its Blackberry phone hardware/software bundled device for entries into the consumer and business electronics market. Blackberry phones did recover a fair amount of market share over the past 5 years: Its total market share went from 1% in 2007 to 3% in 2011. However, this number is likely to fall to below 2%, as described below.
The push email service presently is the company's greatest driver of margins. The email service operates at around an 80% margin, whereas Blackberry phones sell at a 35% margin. Ever increasing competition for this subscriber service, coupled with a decrease in sales of the hardware that supports it, will soon trivialize these attractive margins.
Selling the Ashes
The release of the new Blackberry 10 later this year is (correctly) thought to be RIM's last shot at maintaining any market share. The phone uses, for the first time in the company's product history, third-party and licensed software and hardware to power the user interface. This "patchwork" phone is the result of many mini-acquisitions the company has made, including its acquisition of QNX Software in 2010. Additionally, it will have no keyboard - a clear tendency toward the smart phone arena. But this first release of this phone, in my estimation, cannot reasonably be thought to cure the company's ailment; in any case, the release date for later this year might be too late. And if the Blackberry 10 release is anything like the Blackberry 7 release, Research In Motion will be simply laughed out of the auditorium, and the market.
The company also recently put forth its second attempt at the Playbook tablet, running its own operating system to compete with Android and iOS. This is still not a tablet worth buying when compared with its competitors as it offers nothing really "new" from Android and iOS. The system sells at around $200 and is expected to sell at neither a higher price nor at greater volume (unless, of course, the company invests to overhaul the tablet yet again). The enterprise market has (anomalously?) continued to be dominated by Blackberry. Research In Motion has a 52% market share in enterprise business, presumably due to the email push features and personal data organization integration. Data services from the company are experiencing ongoing price competition from ever improving apps that also offer push notifications. Enterprise business will likely be eroded if RIM does not augment its app store. Dell and other enterprise-minded manufacturers have also released tablets, and the number of entrants into this market will only increase competition and lower sale prices.
Wait, a Spin-off?
In the wake of these uninspiring product releases, the company is looking to sell its handset and email businesses by either spinning off those operations or selling them to a competitor, according to information from Dow Jones. The divestiture would likely involve a spinoff of the messaging company into one business and the handset company into another - options that JPMorgan and RBC Capital are presently helping the company explore.
Research In Motion's assets might have value, but only in the right hands. The company likely has billions of dollars in patents. Intellectual property has value only when it is implemented in an appropriate hardware scheme, and there is good reason to think that a buyer like Google, Facebook, or Apple might be in the market for such patents.
In all, Research In Motion seems like a company whose assets would look better in more able hands. Without a viable app infrastructure, an integrated operating system, and competitive consumer goods, the company's set of patents and attractive stand-alone holdings could be reconfigured to suit a platform that is part of a more cohesive universe. Apple's iCloud and Google's Drive model are making data readily available from multiple devices, and partitioning phone data from tablet data from computer data is becoming less and less acceptable as a tech model. Apple earns about $8 in revenue for each iCloud subscription, which in turn integrates all of its user's Apple devices together. Maybe some of these devices could use an RIM patent or two…
jewishitalian31 has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Amazon.com, and Facebook. Motley Fool newsletter services recommend Amazon.com and Apple. 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. If you have questions about this post or the Fool’s blog network, click here for information.