RIM’S future success needs a Blackberry hit
U.S. decline cut firm’s share of worldwide smartphone market
Research In Motion Ltd. needs more than the cheapest valuation in the communications-equipment industry to lure potential buyers. It also needs a hit smartphone.
Waterloo-based RIM said last week it will review options, including joint ventures and licensing agreements, and predicted “continued pressure” on revenue and earnings as its Blackberry loses market share to Apple Inc.’s iphone and Google Inc.’s Android system.
After the shares fell 77 per cent in the last year, the $6.8 billion company traded Tuesday at a 32 per cent discount to the value of its net assets, the only communications-equipment maker greater than $5 billion selling at less than book value, according to data compiled by Bloomberg.
With Chief Executive Officer Thorsten Heins saying the smartphone maker would also consider a sale, an acquirer could pay a 41 per cent premium and still buy RIM at the industry’s lowest price relative to earnings.
Ironfire Capital LLC says RIM may attract interest from Amazon.com Inc. with its operating system and tablet, while Samsung Electronics Co. may be drawn by the email and messaging infrastructure, said Recon Analytics LLC.
Still, the fate of the company — and any takeover — rests on the success of new Blackberry 10 devices to stabilize customer losses, according to UBS AG.
“It’s easy to say it’s cheap and that somebody’s going to acquire RIM, but it becomes a little bit harder in reality,” Walter Todd, who oversees about $950 million (U.S.) as chief investment officer at Greenwood Capital in Greenwood, South Carolina, said in a telephone interview. “They’ve had some stumbles from an innovation standpoint. Why rush to catch a falling knife?” RIM spokeswoman Tenille Kennedy said the company doesn’t comment on speculation. While Heins said on March 29 that a sale would be considered, it’s not the “main direction” for RIM’S strategic review. Heins, who became CEO in January, also said RIM will refocus on business customers and more targeted consumer segments after sales missed analysts’ estimates for the fifth straight quarter.
RIM’S Blackberry, the dominant smartphone in the U.S. before Apple unveiled the iphone in 2007, has lost market share in the past three years as consumers turned to iphones with faster Web browsers and more applications.
While former CEOS Jim Balsillie and Mike Lazaridis, who both stepped down in January, had assured investors the latest iteration of its smartphone would deliver a revival, Blackberry 7 devices with better Web browsing and touchscreen navigation failed to do so after going on sale last year. Total sales last quarter tumbled 25 per cent from a year earlier as U.S. revenue plunged 57 per cent, RIM said.
The U.S. decline reduced RIM’S share of the worldwide smartphone market to 8.2 per cent in the fourth quarter from 14 per cent a year earlier, while Apple’s share rose to 24 per cent from16 per cent, according to research firm IDC. Market share for Samsung, the biggest handset maker to run Android, jumped to 23 per cent from 9.4 per cent.
“The competition has more resources, they’re further ahead and they’re running away faster,” said James Faucette, an analyst for Pacific Crest Securities. “At some point it will get cheap enough that somebody will buy it. I don’t think it’s cheap enough yet.”
Valued as high as $83 billion in June 2008, RIM’S market capitalization plummeted to $6.8 billion as of Tuesday. The stock’s 91 per cent plunge from its peak is the secondsteepest in the Nasdaq-100 Index. In the same time, Apple shares have more than tripled, giving the company a market value of $587 billion.
“I don’t think there’s any urgency to acquire RIM given what’s happened to the stock,” said Todd of Greenwood Capital. “It is trading below book value and at some point it becomes attractive.”
The company is also the least expensive in the industry relative to free cash flow and its $1.16 billion in net income in the last 12 months. After annual revenue at RIM fell for the first time in the company’s history last year, sales are projected to drop 16 per cent this fiscal year to $15.5 billion, according to analysts’ estimates compiled by Bloomberg. The company also posted its first quarterly net loss since 2005. RIM said it will no longer give financial forecasts, in part because of “weakness” in its U.S. business.
Heins is counting on the new Blackberry 10 operating system to stabilize sales. The first device will come out in the “latter” part of this year, he reiterated last week.
A full takeover of RIM or a licensing deal is “only conceivable once business conditions stabilize and after BB10 devices have proven some success,” UBS analyst Phillip Huang, wrote March 30. “RIM’S future depends on BB10. There is simply too much flux at this juncture for any acquirer to have a good handle of the intrinsic value of this company.”