Research In Motion should split operations, analyst says
HARDWARE, SOFTWARE Software unit has most potential, says Ray Sharma
What would happen if Research In Motion Ltd. split itself into two companies and actually sold off the division that made the company famous?
The Waterloo, Ont.-based company is no doubt best known for its hardware business, which manufactures the wildly popular BlackBerry devices. But increasingly, that hardware division is less profitable and under more intense competition than RIM’s other side, the software division.
It’s RIM’s software business that has the most potential, Griffiths analyst Ray Sharma suggests, and as such, he thinks RIM’s future may be brighter as a pure software, service and royalty play.
While it may at first seem counterintuitive for RIM to rid itself of its symbolic status as manufacturer of the ubiquitous BlackBerry devices, the move might actually benefit the company in the long run, Mr. Sharma argues.
For starters, while he estimates the hardware side will bring in more than US$2.2-billion in revenue in fiscal 2007, the prohibitive manufacturing, research and development, sales and marketing costs associated with this business eat away at those revenues to the point that he only expects US$423-million in net income from it in two years’ time.
Contrast that with the US$376-million net income on US$814-million in revenue he forecasts on the software side, and it’s easy to see why he’s intrigued by the possibilities. Just on the margins alone, the move could make a lot of sense.
Whether it’s defending itself in copyright lawsuits or battling for market share, RIM has been attacked on all fronts of late, Mr. Sharma notes. Divesting the hardware business to a competitor like Nokia, Motorola or Qualcomm would allow the company to fight one battle at a time, he said.
The stock is currently trading at US$68.10. Mr. Sharma had a “hold” rating on the stock until last week, when RIM shares fell about US$9 thanks to an underwhelming second-quarter report. He raised his rating to “buy” yesterday, as his target price is US$81. But if RIM were to spin off its hardware business, Mr. Sharma says the shares could be worth upwards of US$95.
He believes the hardware business would be worth US$7.5-billion (pre tax), based on 17.5 times his fiscal 2007 income forecast for the division. The remaining software business would be worth US$11.3-billion, based on 30 times his fiscal 2007 net income project for that division. RIM’s market capitalization is currently US$13-billion.
Despite the number crunching, Mr. Sharma has a few concerns about selling the hardware assets, not the least of which is how the huge capital gains might affect RIM’s tax situation. But in the end, it’s largely a moot point anyway.
“ The exercise of exploring the separation of RIM into a Hardware and BlackBerry division is purely speculative,” he says. “But it does demonstrate the potential benefits [and] concerns for shareholder value.”