I recently had the pleasure of reading an article by Andrew Hall entitled "It's Time For Apple To Buy BlackBerry." In the piece, Mr. Hall points out that owning BlackBerry (BBRY) would help Apple (AAPL) establish a dominant position in the corporate phone market. Further, he notes that BlackBerry could be acquired rather cheaply, especially given BlackBerry's large cash position. However, I must disagree; Apple won't buy BlackBerry, and I'll explain why below.
Two Entirely Different Software Ecosystems Makes No Sense
Fundamentally, BlackBerry's and Apple's greatest strength in the smartphone space is that each of these companies controls its own software ecosystem. While Google's (GOOG) Android has created a common software - compatible baseline upon which the device vendors can build customizations and not try to reinvent the wheel, both Apple and BlackBerry have the resources and the clout to go with their own platforms. Apple much more so than BlackBerry, but as BlackBerry still has cash and a brand, it's not crazy for BlackBerry to want to build its own platform.
However, the question is, why would Apple be interested in owning - and promoting - two incompatible software ecosystems? Apple most certainly wants to enter the corporate market, but buying BlackBerry and fragmenting its consumer/business ecosystem makes no sense. Apple can and will continue to push iOS into the corporate space, and quite frankly, I see no reason why Apple can't succeed here. The iPhone is a well loved, well built product with a solid software platform that runs apps with the best of them.
There's Nothing BlackBerry Has That Apple Needs
Obviously for real M&A, the acquirer typically needs to want something that the acquisition target has and would be too costly/slow to build it up internally. So what does BlackBerry have?
- Phone design team
- QNX (OS) team
- Software developers
- Moderately strong brand
- Some patents
Apple has all of these things. Clearly Mr. Ive over at Apple has a solid handle on the phone design part of things - iPhones are very well designed and built. Apple's OS/software team is superb and top shelf, especially given how the firm has been able to make the iPhone/iPad "feel" much faster than its Android counterparts running on much speedier hardware. Next, Apple has one of the best brands in the world that BlackBerry could only dream of having. Finally, BlackBerry may have patents, but Apple isn't exactly trying to defend itself against BlackBerry's patent portfolio in the courtroom these days.
It's just very difficult to see just what BlackBerry has that Apple doesn't already in terms of technology.
Would It Make Financial Sense?
The obvious question is whether such a move would even make financial sense. If, as Mr. Hall suggests, BlackBerry can be purchased for $7B - $8B net, then how long would it take for Apple to make its money back on its investment, as it certainly doesn't need to leverage BlackBerry's technology or brand?
Well, over the last 12 months, BlackBerry posted $3.15B of cash from operations and $768M in levered free cash flow. If BlackBerry can keep FCF constant, then at a purchase price of $8B, it would take a little over 10 years. Should BlackBerry actually beef up its FCF to the tune of 10%/year, then the purchase could pay off in considerably less time. However, there are a number of problems:
- Wouldn't it be easier to make that kind of money selling iPhones into BlackBerry's space?
- Is there any guarantee that BlackBerry's Z10/Q10 products will even be successful?
- What is the opportunity cost on that cash? Are there better, lower risk investments that could help grow the business?
- Is BlackBerry enough of a competitor to buy it out just to shut it down?
While I don't have a crystal ball, I would tend to think the answers to these questions would paint an unfavorable view of such an acquisition.
Conclusion: Not Happening
I don't think it's necessarily a good idea for Apple to buy BlackBerry. BlackBerry's market share is negligible (and it is not clear that any market share BB10 devices takes will be significant), and BlackBerry doesn't really have any technology that Apple needs. Such an acquisition would be done only to squash a competitor, but that's never been Apple's style. Just because Apple has $137B in cash doesn't mean that it's going to go waste it. And, on the flip side, just because BlackBerry's cheap doesn't mean that Apple (or any other company) should buy it.
Most importantly though, BlackBerry shareholders should oppose a buyout at anywhere close to these levels; if the recovery story does play out, then I could see the stock trading significantly higher ($30-$40 range) over the next year or so as the business improves and as it gains market share. This, however, is a long shot, so I don't think Apple - or more conservative investors - should really be banking on BlackBerry's turnaround to succeed. It's tough enough selling smartphones in a market where Samsung/Apple dominate, but it's even harder when you're the new platform on the block.
Disclosure: Long BBRY. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.