May 30, 2012
This is what a company circling the drain looks like: Research in Motion (RIMM) has officially hired JP Morgan Securities and RBC Capital to advise it on its previously announced “strategic review” of its business. While the company’s CEO, Thorsten Heins, described the role of these advisors in a jargon-laden statement yesterday as evaluating “the relative merits and feasibility of various financial strategies, including opportunities to leverage the BlackBerry platform through partnerships, licensing opportunities and strategic business model alternatives," the market-speak really translates as “we’re in dire straits and may end up selling part of the business.”
That would be a depressing conclusion to RIM’s saga, which saw a tiny Canadian startup become an icon of the Internet age – its Blackberry phone/e-mail devices were so ubiquitous that they were dubbed “Crackberries.” In the pre-Twitter era, one BlackBerry owner gave the world a taste of what was to come when he carried his device into the delivery room when his pregnant wife was about to give birth, and sent out e-mail updates every few minutes. In the year or two after the 1999 launch of the BlackBerry, long before the advent of the smartphones, possession of the device was a hallmark of status within the corporate world. And the BlackBerry network was secure enough for government use.
But as e-mail has given way to texts and tweets, so the Blackberry lost that cachet – or rather, it forfeited it to the iPhone, Android phones and tablets. After all, the Blackberry wasn’t a multi-purpose device of the same scope as a smartphone. You couldn’t use it to read a book; watch a movie; play Angry Birds.
And as with so many other once-pioneering technology firms, RIM failed to anticipate the advent of Apple’s (AAPL) iPad and, once the latter was launched, failed to respond promptly enough with a competitive product. By the time it introduced its PlayBook tablet to the market a year ago, it was too little, too late; reviews were underwhelming and sales ho-hum, at best. Within months, signs of distress at RIM were evident, as the company axed more than 10 percent of its workforce. A massive outage last October was simply the icing on the cake for many Blackberry customers; RIM’s new smartphones weren’t fashion-forward enough to compensate for being without service. Its market share has plunged from more than 40 percent to about 10 percent of all smartphones, by some calculations. Last year, it took a big writedown on the value of unsold PlayBooks; it wrote down the value of a large stockpile of unsold Blackberry devices last quarter.
Admittedly, the release issued yesterday – which also included a warning that the company expects to report an operating loss for its current fiscal quarter – didn’t state specifically that RIM, with its vast portfolio of alluring patents, is up for sale. But that’s the gist of the company’s pronouncement: It has served formal notice to its shareholders that it can’t complete a strategic turnaround on its own. The declaration that RIM has hired bankers is a de facto invitation for interested bidders to step forward. Once bids – solicited or unsolicited – are made to the board, it will be hard for directors to argue that shareholders should reject them. What’s the alternative scenario? What other option can they point to?
So what lies ahead for RIM? Odds are that it’s the patents, rather than the company’s operations, that will be of most interest to any bidders. The company’s market capitalization today stands at about $6 billion; last summer, analysts at investment bank Jefferies & Co. calculated the company had invested about $5 billion in patents that might fetch at least double that if a bidder like Apple saw an opportunity to pick them up cheaply, or quadruple that in a competitive bidding situation or one where a company decides to fork over the same kind of premium that Google (GOOG) did when it agreed to acquire Motorola Mobility last year for $12.5 billion.
RIM’s slow progress toward the brink of disaster is yet another reminder that the pace of technological change leaves no room for sentiment. Sony’s (SNE) iconic Walkman of the 1980s was replaced by the Discman, as compact discs replaced LPs and cassette tapes; the advent of downloadable digital audio quickly banished both to the same realm inhabited by the 8-track music tape player, video cassette recorders and rotary dial telephones. There is no reason why the Blackberry, long since displaced by the iPhone and other smartphones, shouldn’t join them in oblivion given RIM’s unsuccessful struggle to win back its status as an industry pioneer.
In after-hours trading, RIM’s shares dropped 7 percent; those losses have grown larger today. True, the company trades at a mere 5.2 times its trailing 12-month earnings, but for investors to see it as a deep value buy, they have to be convinced that there is some value in the company itself, and not just its patent portfolio.