On July 15, 2014, IBM (NYSE:IBM) and Apple (NASDAQ:AAPL) announced a new joint venture (JV), an exclusive partnership that will enable both companies to further penetrate the enterprise market for mobile devices. (See press releases, here and here for details.) The aim of this exclusive partnership is threefold: 1) The two companies plan to develop 100+ "industry-specific" enterprise apps, for devices including iPhone/Pad. 2) IBM will resell iPhones/iPads containing these new apps to their clients worldwide. and 3) Apple and IBM plan to develop IBM cloud services that will be optimized for Apple iOS, targeting security, mobile device management (NASDAQ:MDM), as well as big data/analytics.
The result of this bombshell announcement was a gain in the stock price of AAPL and a sharp drop in the price of Blackberry Limited (NASDAQ:BBRY) shares, over fears that the IBM/AAPL combination would eventually overwhelm the one remaining stronghold of BBRY, enterprise software services. Articles in the internet financial press were concentrated on two themes: 1) Pro or Con articles regarding the potential demise of BBRY, as the new IBM/AAPL enterprise service ate up/failed to eat the software services market share now enjoyed by BBRY. (See an SA example here of a pro AAPL slant and an SA example here of a pro BBRY slant.) 2) Articles detailing the "has-to-happen" AAPL buy out of BBRY to jump start the new venture and ensure its success.(See an SA example of this reasoning here.)
Never Is A Very Long Time.
Declarative statements that contain the words "never" and "always" are dangerous to the reputation of their maker because of the open ended timeline contained in them. They are similar to the equally absolute, "the following are strict, inviolate rules…" The fact is, rules--no matter how stringently enforced and no matter how harsh the penalties for their transgression--are made to be broken. Be the truth of this observation as it may, I will demonstrate my hubris in this article with the one reason that AAPL will not buy BBRY; not now, not in the future--in short never.
A Main Rule Of Diplomacy.
History is replete with examples of one of the cardinal rules of diplomacy between nations. Any action taken by a stronger state that takes advantage, large or small, of a weaker state is couched in public verbiage by the stronger state in terms of that state's "good" reason(s) for acting thusly. These good reason(s) are for that state's publics' consumption and to hopefully stop/forestall preventative action by any allies of the victim. What is not divulged, at least not publicly, is the real reason for the action. The real reason may simply be outright, blind aggression, such as in Iraq's 1990 invasion of Kuwait. Iraq simply coveted both Kuwaiti territory and the vast oil wealth that lies beneath it, but Saddam Hussein still took care to publicly state Iraq's good reason, "So what can it mean when America says it will now protect its friends? It can only mean prejudice against Iraq. This stance plus maneuvers and statements which have been made has encouraged the UAE and Kuwait to disregard Iraqi rights ..."
Business is often described in the same terms as the struggle between nations for hegemony in land and/or resources. In the corporate world, the goal is not always hegemony in land and/or resources, but rather in the businesses' main raison d'être of compiling outstanding financial metrics, market share, sales, and profits which lead to a rising stock price. Corporate management shares this penchant to publicly state only its good reason(s) while confining its real reason(s) to the board room.
AAPL's Good Reasons.
AAPL is notoriously secretive regarding its intentions, so don't look for it to hold a press conference or issue a press release to outline the good reasons it would not buy BBRY. Senior management from Tim Cook on down would deflect questions on an AAPL buy out of BBRY with at most a statement along the lines of, "AAPL holds many discussions with companies regarding mergers, but does not discuss possible merger plans in advance." Still a look at what BBRY business would offer AAPL if there were such a buy out deal, shows the various good reasons for AAPL to pass on such a deal.
Firstly, APPL has no use for QNX/BB10 which is the OS of BBRY mobile devices. AAPL has built iOS, its mobile device system, on the same Linux outline as the OS X operating system of its Mac line of computers. It would be more expedient and cost effective to program into iOS from scratch anything in QNX/BB10 that AAPL feels it would be desirable to have, rather than to attempt to cobble on that feature using code from the BBRY OS. One of the knocks on the early windows OS system of MSFT, was that it was a "shell" mounted on top of the MSFT original MS-DOS OS. This factor both slowed its responsiveness and created conflicts that caused crashes. So APPL would scrap the BBRY OS.
Secondly, AAPL has no use for BBRY mobile device hardware. AAPL is not interested in the low end of the device price points, it is content with the 70%-80% of total mobile device profits it garners with its high end devices. Now, one can argue with this "high end" market share point of view, as innumerable financial press articles have, but that doesn't negate its truth as AAPL's main aim. So APPL would scrap the BBRY device division.
Thirdly, AAPL has no use for the BBRY recent mobile device deal with FoxConn, aka Hon Hai Technology Group, and any deals they may have struck with distributors/vendors in Southeast Asia countries such as Indonesia. Any agreement with FoxConn for device design/manufacture falls under the second reason, of low end price points, given above. In addition, AAPL already uses FoxxConn to manufacture devices so there is already a solid relationship with that company. AAPL would have no use for the services of the Southeast Asia distributors/vendors since they would want/need dirt cheap devices that AAPL won't have. In the case of any upscale Southeast Asia distributor/vendor, APPL probably already has a business relationship with them or can easily obtain one. So APPL would scrap the FoxxConn deal(s) and any low end contracts with Southeast Asia distributors/vendors. Do you see a pattern here yet?
Fourthly, AAPL has very limited need for any BBRY intellectual property (IP). BBRY IP is most often one of the reasons, stated by BBRY bulls for a BBRY buy out by ______(fill in the blank). For AAPL though, BBRY IP is not all that desirable for three main reasons: 1) BBRY has been around a long time, so some of its IP has fallen out of/will shortly fall out of patent. 2) Related to BBRY's corporate age is the fact that a goodly portion of its IP is in technology that is either is no longer used or that is rapidly being replaced----scroll wheel/physical QWERTY keyboard IP anyone? 3) Even more importantly, AAPL already has access to some of BBRY's best, most desirable IP. This is because when several years ago there was an auction of the IP of Nortel Networks Corporation, aka Nortel, the defunct multinational telecommunications/data networking equipment manufacturer, a consortium of companies named "Rockstar", headed by AAPL, bought the 6,000 IP portfolio for 4.5 billion dollars. Research in Motion, as BBRY was then named, was part of that group. As part of the agreement forming the group, members agreed to cross-licensed any purchased IP to each other, so AAPL has use of this portion of BBRY's IP already. Before the heads of BBRY bulls explode, I'm not suggesting that BBRY IP has no value, just that it is not as large as BBRY bulls would like to believe. This is especially true in the case of AAPL for the reasons stated. So the value of BBRY IP to AAPL-very limited.
Fifth and last, even the one part of BBRY that would be of use to AAPL is of limited value. This BBRY division is MDM software services, anchored by Blackberry Enterprise Server (BES)/Blackberry Enterprise Messenger (BEM). The security features of these programs/systems is the one place BBRY has managed to hold on to its enterprise customer count. But even here there has been shrinkage. Other companies MDM mobile device security has improved dramatically, albeit from a near zero starting point, and several powerful new MDM software competitors like, Dell, Good, Citrix, and Mobleiron have entered the fray. With the lack of value of most of the rest of BBRY as described above, why would AAPL want to spend billions of dolars to buy BBRY for this one division? The clear answer, underlined by the AAPL/IBM JV referenced at the start of this article, is that AAPL would have bought BBRY instead of making the JV with IBM if this technology was so valuable to it. So the value of BBRY BES/BEM MDM technology to AAPL is more valuable than the rest of BBRY but still limited.
AAPL's Real Reason.
Now we come to the nitty gritty reason for the word never in the title of this article. I will now expose this viewpoint to the numerous expected slings and arrows of both the BBRY bulls and the legion of AAPL haters.
APPL could easily buy BBRY for 12 billion dollar or about $20 per share, including the convertible issue of 2013. While this would be expensive considering how few parts of the BBRY whole are useful, this is lunch money to AAPL, so cost isn't a factor here. What is the factor, and the "never" of the article title, is the reaction of the Canadian government, not just to a foreign company takeover of a major Canadian company (the ole "good" reason again), but to the devastation of Canadian BBRY employment as a direct result. AAPL would scrap the hardware device division and the OS division immediately. AAPL would keep any/all of the best software engineers in its employ, but the rest of the BBRY employees would get pink slips. How many BBRY employees would be let go? Impossible to put exact numbers to this since the employment numbers for each part of BBRY are not broken out. But it would be a substantial number. BBRY, through its recent multi-year travails, has already been forced to lay off a large number of employees from the peak employment in 2008-09, but the actual numbers and from exactly which divisions, has not been disclosed. It is true these previous layoffs did not produce a political firestorm as these terminations certainly would, but remember they were a case of a home grown Canadian company destroying Canadian jobs. In this case, Canadian politicians would immediately wrap themselves in their flag and fling dark mutterings at AAPL, Washington, and any other non-Canadian company they could think of----between frequent bouts of apoplexy! One can only imagine the political repercussions this would have both in Ottawa and in Washington.
Although it is dangerous to say that an event, in the market or anywhere else, will never occur, I am quite sure that AAPL will never buy BBRY for the reasons outlined above. As far as the theme of "will the IBM/APPL JV hurt BBRY and its chances of survival", the jury is still out and will remain out until some hard sales figures for the new IBM/AAPL joint venture appear. Certainly BBRY doesn't need any additional problems, particularly in their last bastion of MDM software services, but their entrenched position in this important area at least gives them a fighting chance. Only time will tell the whole story.
Disclaimer: The information I have provided is not meant to be investment advice, nor is it guaranteed in any way to assure investment success in the companies mentioned in this article. Potential investors in any/all of these companies, need to make their own investment choices based on further due diligence & their particular investment needs/styles.
Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.