There are rumors that Research In Motion (RIMM) is looking to split its message business unit from the Blackberry mobile developing unit. It recently hired JPMorgan (JPM) and RBC Capital to find alternative strategies that will help the Blackberry's mobile business. It is rumored that the company is considering other alternative options. This includes disposal of its unit, spin-off or even a merger with a company that complements its technology. Since its Blackberry Messaging unit is still popular, the company plans to separate it from the overall losing mobile business. This will assure that it can retain the goodwill on the messaging unit.
The company has consistently missed analyst estimates. Investors are concerned whether Blackberry can really turn around its fate. The trend is clear as both Apple's iPhones and Android phones have been clearly taking away market share from Research In Motion. Management has been doing several measures to reverse the situation. The only thing that keeps them at float is its cash of around net cash of $1.77 billion. Annual operating cash flow is almost $3 billion, implying that there is no cash burn as of the moment. Given that its sales growth has consistently declined for several quarters, the net cash position might be reversed sooner than expected.
Who will be the possible takers?
Sources say that possible buyers of RIM include Amazon (AMZN) and Facebook (FB). Rumor has it that Facebook is attempting to develop a smartphone. I believe that Facebook is a serious buyer, because it would be a good fit with RIM. RIM has always been anchored in the corporate world. A buyout by Facebook would bring RIM back into the social arena, where it could better compete with Google (GOOG) and Apple (AAPL). At the same time, Facebook would have a huge tangible asset with which it could integrate its advertising push, and much more. After all, Facebook's closest business partner at the moment is Zynga (ZNGA).
According to a report by Zdnet, Amazon looked into RIM late last year. RIM supposedly turned down the offer because it wants to "fix its own problems." I think Blackberry's highly popular functionality, with its keyboard and email feature, would provide a big boost for Amazon. I think Amazon could also benefit greatly from Blackberry's email security (making Amazon payments for purchases more secure for customers), and also benefiting from its stunning keyboard options (which could make ordering purchases easier), for example.
Splitting the company may not be a good idea. It seems that RIMM's hardware and software divisions complement each other. Its Blackberry handsets will require the data network for some of its functions including email and web browsing. On the other hand, its data network cannot function without the Blackberry phones.
There are also reports that the data network and messaging software would likely open up to its rivals, Apple and Google. This may be a good thing if all possible prospects fail. However, there are no fixed plans yet. Research In Motion is not planning to do a restructuring on a piecemeal basis. Although there's news that the whole company is for sale, selling the company will be its last resort should the plan to spin-off will not materialize.
Is this another Palm in the making?
Recall that in 2001 Palm Computing decided to split itself into two. The Palm One became the hardware company while the Palm Source was its software division. A year after the split-off, Access acquired Palm Source.
Palm One changed its name back to Palm. Hewlett-Packard (HPQ) acquired Palm in 2010 for $1.2 billion in cash amid declining sales. A year after its acquisition, HPQ announced that it will stop producing anything that is related to Palm. This came after HPQ had several CEO replacements and restructuring plans.
The problem with Palm was that it did not try to segment its market. This is the same problem that RIM potentially faces. Palm's software business got Sony to license it. The result was Sony was taking a slice from the Palm hardware market. Eventually, it decided to license its software to the Microsoft Phone platform. However, those efforts were already too late to succeed.
If Palm would have not been a Hewlett-Packard company, it could have carried out its plans in the smartphone market. It probably could have had a good shot at reviving itself in the current smartphone market.
Why is the discussion of Palm relevant here? It shows us that history will repeat itself if RIM does not take swift action. RIM can make this work if it makes the right decisions by segmenting its market. I think RIM's best bet is to sell itself to a company like Facebook or Amazon.
The stock is currently trading at 4 times earnings. This seems really cheap even without the net cash it carries on its balance sheet. Over the last 5 years, the stock has traded between 6 times to 45 times earnings. This is significantly lower than the industry valuations. Industry Price Earnings is at 14 times.
However, the current valuations reflect that there is a possibility that the Blackberry Phones will be obsolete in the future. RIM cannot compete alone with smartphone leaders Apple and Google. While it still carries on a net cash position, I expect that cash burn will be an issue moving forward. Unless there is an existing buyer for the whole company with a clear plan to turn around its operations, there's a big possibility of a permanent loss of capital from investing in Research In Motion shares.
Investors should carefully watch the developments surrounding a possible buyout. If a buyout looks likely, I would recommend buying RIM immediately. However, if RIM continues down the same path it has been on over the past few years, then I would certainly recommend avoiding altogether.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.