Will The Board Members Of Research In Motion Stop Procrastinating And Unleash Value?

Apr.28.12 | About: BlackBerry Ltd. (BBRY)

If you take a close look at the way the Board members have gone about conducting affairs of Research in Motion (RIMM), one would (hopefully) mistakenly conclude that these directors have other vested interests to see RIMM's stock trading at unthinkably low levels.

Enough has been said about all the mistakes/blunders RIMM made in the last few years, so I won't repeat them again. I will discuss where this Board went wrong and what they should do now. The RIMM board cannot change the past; but surely can learn from it and be realistic about the current situation and take the optimal path going forward.

Everybody, except this Board, knows that it is inevitable for RIMM to undertake a transformational transaction. Each day this Board delays, the further it robs shareholders of more of their capital invested. RIMM's board and senior executives have missed out on two important traits crucial in high tech: (1) adaptability (they should have read Charles Darwin/Russell Wallace) and (2) always being paranoid (they should have read Andy Grove). Somewhere along the way, RIM's board also forgot that its sacred duty (and its most important responsibility) is to protect the capital that the shareholders have trusted them with.

The current chairperson Barbara Stymiest promised to overhaul the board, but again, true to its form, RIMM is taking forever to implement changes and so far we have not seen anything substantial. After all the losses that the shareholders suffered and RIMM's business taking a beating, one of the Board members gave an interview as late as February, 2012 that was extremely arrogant, misplaced and delusional. The good professor does not get it at all.

Since then, thankfully, RIMM has not made any such grave mistakes. But inaction is equally inexcusable. Earlier in January 2012, the new appointed chief, Thorsten Heins, also showed a delusional and arrogant streak in an interview that he gave for die-hard Blackberry fans at Crackberry.com where he ruled out a sale and basically stuck to the old ways of doing things saying that RIMM does not need a major change in strategy (by then he had been with RIMM for more than 4 years in a senior executive role). Nothing could have been further from reality.

Thankfully, he recanted that a couple of months later and conceded that RIMM does indeed need a substantive change. The $20 billion question now is if Thorsten has the courage and the wisdom to make real substantive change and do it sooner than later. A day delayed is a day wasted and more losses for the shareholders and further deterioration of the Blackberry brand.

The integrated company model (hardware, software, services and network) is no longer viable for this company or at best, a very risky strategy to pursue. The integrated model may have been a huge success if RIMM had not dropped the ball and let Apple and Google run with it. Besides a Canadian hardware vendor cannot compete profitably for those low-end devices markets in developing world against Asian manufacturers; just ask Nokia.

It's too late for RIMM with its meager resources to build an empire like Apple because of dependence on partners and ecosystems. RIMM has only $2 billion in cash and the stock is way down to raise any money in a secondary offering. As I previously stated, RIMM is one of the most viciously attacked company ever and that means RIMM has even a taller mountain to climb to fight all these forces - many of them even malicious with vested interests.

Compare this to the other three competitors: Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL) and Microsoft (NASDAQ:MSFT) having access to tens of billions of dollars. Those who bash RIMM do not realize that RIMM presents a great value to the customers, is essential for the security conscious customers and also will keep other vendors honest.

RIMM has been very unfairly maligned and despite all its shortcomings, it does not deserve what it gets day in and day out from Wall Street and the media. RIMM has some great assets, but those are overlooked by the media and the analysts. How can the analysts, who were putting a value of $20-30 billion on the Blackberry network not too long ago, now value the entire company at $5-10 billion, while RIMM has increased its book value?

RIMM is not in the business of "righting the wrong", but in the communications business where shareholders have trusted its Board with their capital. Despite Steve Jobs threats to "right the wrong" against Google and spend $40 billion in doing so, I don't see Apple taking that course, but returning money to shareholders and going about its business and becoming the most valuable company ever on this planet.

Among all the stakeholders of RIMM, the shareholders have taken the worst beating. The sole focus of this board now should be to unleash the value of assets that RIMM owns. I am cognizant of the fact that the valuation of different assets of RIMM has a wide range so the discussion below will be, and I can wager on that, challenged by the readers on both sides of the fence and rightly so. My analysis, assuming the board and the management are shareholder-friendly and take the right steps, suggests that RIMM is severely undervalued.

So what should RIM do?

RIMM should spin off the network/services business right away. Remember what IBM did and Sun did not? The network/services company (let's call it BBMI…any resemblance to IBM is purely co-incidental) will own the unique and highly secure network (and the applicable patents and service contracts). It will provide multi-tiered services, including universally loved BBM, to all mobile devices without any preferential treatment to any mobile platform. This network is connected to every carrier on this planet and to back-end systems of almost all the S&P 500 companies using what Jim Balsillie calls RIMM's secret sauce. BBMI's network will leverage a potential target of more than a billion devices and growing. BBMI can capture this market before competitors come in and establish a prohibitive lead.

This will be the only company of its kind and probably worth $20 billion right away (approx. $40 a share) and should go up in value over the years. Let's say over the next 2-3 years, BBMI provides service to 500 million devices using its network with average price of $3 per month. That's $18 billion a year and my guess is that this business will have a 50-70% operating margin. No one outside RIMM knows this number for sure. Now add other value added services that BBMI can provide.

Now look at the valuations of a company like Salesforce (NYSE:CRM) and we come up with a very high valuation in 3 years ($50 billion is probable). Mike Abramsky, an analyst who recently left RBC and who has followed RIMM for a long time valued this network at about $21 billion in July, 2011. Yes, I know there was an outage after that, but what system does not break-down at some point or the other. BBMI should be totally independent so all the mobile devices based on all platforms receive the same deal.

There will be challenges trying to integrate different platforms to this network and also working out deals with all the carriers. Plus the network has to be upgraded to handle more volume. The free cash flow generating capacity of this business will be phenomenal.

The hardware business is masking the value of the services business. Let that value be unleashed. Carve out the network business and return that value to the shareholders in form of stock in that company.

The new-RIMM without the network will keep majority of the cash and all the remaining assets. This company can either: (1) become a licensing/development company for the BB10 platform (and the patents) and sell the hardware business or (2) operate business as it does now without the network exclusivity, but partner with a vastly more resourceful company…or some combination of the two. Another thing the new-RIMM should do is put a team together to study in-depth the feasibility of developing a platform on Android with a secure Blackberry layer around it and see if it can have best of both the worlds. Having spun-off the network business; new-RIMM gets a new lease on life and more flexibility.

If "super-phones" and other devices based on BB10 platform turn out to be a big success then the shareholders will get very handsomely rewarded by this business as well. With all the litigation surrounding Android and all the patents wars, chances are somebody will pay a good price to acquire the new-RIMM or there will be a number of interested parties to partner with.

Spinning off the network business is the best path for RIMM and sooner the better. A diligent and shareholder friendly board will not waste another day delaying what is inevitable. Beginning spring, 2011 RIMM board should have started looking for a buyer/spin-off/licensing or any such major transformational transaction. For almost a year now; a growing number of RIMM observers have been calling on RIMM to take one of the five actions but this Board has sat idly by while there has been a complete annihilation of shareholder value and that is unacceptable. By further delaying, this Board is only compounding its already massive mistakes.

To those who say BB10 phones will be the best in the market and that RIMM should remain an integrated company, I say, maybe so but RIM is not Domino's pizza that can make a turnaround on its own. RIM is dependent on carriers, partners and apps (ecosystem). This is akin to my investment in RIMM: I know RIMM has a lot of value but I am dependent on this Board and CEO to act rationally and in my best interests.

Okay, let's take Thorsten Hein's statement about viability of a number of car makers in Germany. I am a car manufacturer and I make the best car but if you cannot take that car on the only road that goes to your favorite restaurant (for example Skype) or you cannot take that car on the only road that takes you to your favorite observatory (for example Netflix) then, notwithstanding how good I make my cars, will you buy it? Now extrapolate this to roads that go to your gym, to your friends' houses. You get the point.

And then there is Apple, Microsoft and Google who will use vast resources to capture a big part of soon-to-be trillion dollars a year industry. Going alone is not an option for RIMM anymore. But if RIMM partners with influential and resourceful companies, BB10 based devices can get the proper support from the ecosystem and the carriers. If BB10 turns out to be the most spectacular platform and the devices based on very competitive then BB10 will not need the crutches of the Blackberry network.

In any case, why bet everything on BB10? Carve the network and return that value to the shareholders before that value gets further damaged. Plus you increase the chances of success with BB10 with the pressure off; media bashing fading away and short sellers gone to greener pastures. It will be also easier to ink a partnership deal or sell this new company outright.

A carefully crafted deal that incorporates the elements above can immediately propel the stock much higher than where it is today. We could see the stock at $50 in relatively short time and if both the companies take off well, we could see a $100 stock (after considering the split) in not too distant a future.

Of course, if the right buyer comes along and offers a good price for the whole company, the board should take that offer. Maybe even proactively seek one. It is possible that one potential may trigger interests from other buyers and we all know what that means.

A price of $14 per share for a company that is a significant player (though losing market share) in an industry that is exploding, and with a book value of $20 a share, is unacceptable. This has been the case for a few months now. Value dictates price but there are several instances when price affects value as well. This coupled with relentless attacks does affect RIMM's business. Consumers, businesses (may think why invest in a platform that may not be around), app developers, investors (self-explanatory except for very long-term investors, but soon they also see negativity impacting business) and present and future employees (demoralized, good people may not join RIMM) are all negatively impacted.

A transformational transaction will turn the tables so RIMM gets a new lease on life and shareholders get some major relief. An astute, street-savvy and investor-friendly Board that takes its fiduciary responsibilities seriously must take actions that can unleash hidden value of RIMM's assets. Not doing anything or just playing at the periphery will not be enough.

Disclosure: I am long RIMM.