A Match Made in Smartphone Heaven

By Palwasha Saaim - June 29, 2012 | Tickers: AAPL, BBRY, GOOG, MSFT, NOK | 0 Comments

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The announcement of Q1 earnings for FY13 by Canada-based Research In Motion Limited (NASDAQ: BBRY) yesterday sparked a new debate about its future fate. RIM stock that has been receiving negative reviews for at least three quarters is trading this morning at a whopping 77% discount from its 52-week high of $33.54. Everybody is questioning the BlackBerry maker’s survival. TMF writer Sean Williams opined yesterday that bankruptcy could be a possibility. He is right based on his arguments, but I’ve partial disagreements.  

For starters, let’s be realistic, can a phone with as many as 78 million subscribers, up from 70 million last September, just vanish from the market overnight (or even over eight months until BB10 comes out)?  After all, the President of the U.S. has been using it! Not impressed? What if I told you Kim Kardashian also uses a BlackBerry? (That iPhone was a Christmas present from her sister.) Excited? 

Certified as the most secure mobile devices for the US and Canadian governments, the BlackBerry phones are still used by over 78 milliion subscribers around the world, mostly corporate executives and government officials. Even during the tumultuous first quarter, BlackBerry's subscriber base grew in all regions globally except for North America. The company was able to generate $100 million in cash in this quarter alone to make a total of $2.2 billion. 

The numbers aren’t flattering when compared with a competitor like Apple Inc. (NASDAQ: AAPL), but then the comparison wouldn’t be fair either. You cannot compare Steve Jobs with Jim Balsillie or Mike Lazaridis. It’s just not fair! Apple’s founder nurtured his baby company till his last breaths while RIM’s founders took home a multimillion dollar compensation leaving behind a complete disaster for Heins to deal with. 

Will the real RIM management please stand up? And leave! 

Despite all the bad news, there’s no denying the fact that the company still has potential to grow. All it needs is new management. The new CEO has already hired JPMorgan and RBC Capital Markets who after conducting a strategic review may suggest selling the company.  Even if management is not ready to let go of their chairs, the acquirer can always make a tender offer directly to the shareholders who would undoubtedly welcome the new management at this point. 

Now comes the million dollar question. Who would want to buy this dying company (dying because of poor management and not business prospects)? 

Up until March 2012, Samsung and Nokia have topped the total market share of mobile phones (inclusive of smartphones), followed by Apple. If taking solely the operating systems stats into account, then Google’s Android holds the biggest market share globally followed by Apple’s iOS. Clearly, Samsung, Nokia, Apple and Google don’t need anybody else at present to partner with them. They’re good on their own. Who’s left? Microsoft! (I think I’m about to get bashed in the comments section, but oh well!).

What does Microsoft get? 

Why would Microsoft, which has its own OS, want to buy a company that runs its phones on a different operating system? Here goes:

1. Diversification.  
2. Addition of $1 biilion to $4 billion worth of patents to Microsoft’s portfolio.
3. Addition of RIM’s current 78 million subscriber base to Microsoft.
4. Economies of scale through horizontal integration.
5. Synergies that will increase after-acquisition value of the whole more than what the two companies are worth individually.
6. A new product line for Microsoft-loyal customers to choose from.
7. A new and improved BB10 with a Midas (Read: Microsoft) touch.

RIM has got technology, Microsoft has got brains! 

The price tag says? 

If (say hypothetically) Steve Ballmer reads my blog and decides to acquire RIM, what price should he pay? In order to determine a suitable target acquisition price for RIM, I got hold of some comparable companies. I dropped Samsung and Apple and moved to smaller/cheaper companies like HTC Corp. (Taiwan: 2498), ZTE Corp. (HK: 763) and Nokia Corp. (NYSE: NOK) to make the comparison more relevant. I calculated P/E, P/B and P/S for the three companies and took an average of each (Table 1). Then I multiplied the average comparable P/E, P/B and P/S with RIM’s EPS, book value per share, and sales per share, respectively, to arrive at three prices based on fundamentals (Table 2). An average of the three prices gives a target acquisition price without taking into account acquisition premium. 

The average acquisition price for RIMM turns out to be around $16.12. When Google Inc. (NASDAQ: GOOG) acquired Motorola Mobility last year, it paid a premium of 63% above the then share price of Motorola Mobility. Microsoft Corp. (NASDAQ: MSFT) was willing to pay over $19 billion to Nokia, which was a premium of more than 25% above the then share price of around $4. Take the average of the two and you get an acquisition premium of around 44%. However, $16.12 is almost a 113% premium above RIM’s current stock price of $7.57. If Microsoft makes a move right now, it will have a great bargain margin. 

Can Microsoft afford this romance?

Microsoft has $58.15 billion in cash as of March. If it decides to pay off all its current liabilities worth $26.17 billion and retains half of the remaining sum for future expansions, it will still have $16 billion at its disposal. To buy all of RIMM's outstanding shares at, let's wildly assume, a 100% premium, the acquirer only needs $8.4 billion. There! You have the answer.

After the postponement of BB10, whatever little hope shareholders had has evaporated. For RIM’s current management, all ships have sailed yesterday! 

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