Apple Should Take A Bite At Blackberry

 |  Includes: AAPL, BBRY
by: Robert Wu

Blackberry (NASDAQ:BBRY) is looking for a buyer. The current offer from Fairfax is $4.7 billion ($9/share), subject to financing and due diligence. The market is quite skeptical on the offer. The stock is trading 12% below the offering price. Most analysts seemed convinced that no strategic buyer would show up. I, however, would argue otherwise. Given its net cash position, valuable patents and niche important market share, Blackberry can provide some benefits to a strategic buyer if the price is right. Among all the players, Apple (NASDAQ:AAPL) would be in the best position to takeover Blackberry. The following are some of the reasons.

1. Patents. Apple is in a patent war against Samsung and other Android mobile phone makers. Eventually, all the disputes will be settled. Blackberry's patents will bolster Apple's position in negotiation table. Given Google paid almost 12 billion for Motorola (mainly for it patents), it is quite reasonable for Apply to buy Blackberry's patents for 2billion.

2. Important niche market. Blackberry still has major government agencies and big financial institutions as its clients. President Obama is still using a Blackberry. When security is the most important factor to choose a cell phone, Blackberry is still the first choice. There is no question that the market share is eroding for Blackberry. If nothing happens, Samsung and Apple will eventually take over this highly lucrative market. However, if Apple takes over Blackberry, it will own this market immediately. Governments and major institutions will be very happy to see Apple as their vendor. In addition, Blackberry is big in some emerging markets, especially in Indonesia and other Southeast Asia nations. Apple will get all the distribution channels and customers in these countries by owning Blackberry.

3. The cost of winding down Blackberry hardware operation will be minimized. It is most likely that Blackberry will have to shut down or significantly curtail its hardware operation. The cost of wind down the operation has the market worried. That's one of the reasons why Blackberry is trading at such a low valuation. Most analysts think it costs about 1-1.5 billion dollar to winding down the operation. The biggest cost is the severance package. If Apple takes over, however, it can retain most of the engineers. The cost of severance will be minimized. Blackberry has some of the best engineers in Canada. It will benefit Apple greatly if it can retain these talents. It costs millions to hire hundreds of experienced engineers. In addition, the market did not attach any value to Blackberry's buildings, improved leases and equipment. The value of these fixed assets is 1.5-2 billion. It is of little value for financial buyers but will be valuable for Apple. It can use these facilities and equipment right way.

4. The valuation is compelling. Blackberry has 2.5 billion in cash. Patents worth about 2 billion (lower end of estimates). The secured network could be valued at 1 billion. If Apple pays 5.5 billion, then it will get all the customers, distribution channels, plants and equipment for free.

In summary, Apple will benefit from taking over Blackberry with a $5.5 billion offer. Apple will get the secured network, the patents, customers in the niche market and hundreds of talented engineers with minimum costs. Tim Cook should seriously consider it.

Disclosure: I am long BBRY, AAPL. 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.