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Tiago Romão
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I'm a Portuguese trader with a focus on the US Stock Market, always looking for good deals and investment partners. Academically I've a Degree in Management and a Master Degree in Finance which brought me the knowledge in terms of management, finance and global economy. My previous career as a... More
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  • Research In Motion, 4 Scenarios (3 Upside; 1 Downside) 1 comment
    Feb 21, 2012 6:46 AM | about stocks: AAPL, AMZN, IBM, MSFT, NOK, BBRY

    Research in Motion (RIMM) has been in a falling stock for the last year due to their failed strategy on smart phones innovation, in which the competition keep lunching new devises with a more appealing designs, better software and more aggressive marketing campaigns, leading to a downward trend both in stock price and market share.

    Now there could be four scenarios for RIMM future:

    1. Takeover on RIMM;
    2. New Blackberry 10 and restructure of product lines, starts a new lifecycle on company;
    3. Company liquidated;
    4. RIMM continues on losing market share and margins deterioration.

    Takeover on RIMM

    After a few weeks with daily news about potential buyers for RIMM it seems that now no one believes in it, even with the stock on similar price when these rumors started. Before we speculate on potential buyers there is a need to see a minimal price that most shareholders are willing to sell, and it would be at least their average price.

    For example, Primecap Management Company, the biggest shareholder (5.42%) bought 65% of his stake below $40, therefore if his average price is around $35 it would be difficult for any takeover to occur at a price below $40. This pattern is similar for the biggest shareholders who represent around 20% the total holders, moreover, it has been reported that Fairfax Financial Holdings LT (5.12%) and Greenlight Capital INC (0.56%), two major references in the market, bought RIMM below $18 because they are looking for value.

    When Amazon (AMZN) begun conversations with RIMM in August 2011 the price was between $20.28 and $33.05, therefore we can say with confidence that to assure a successful takeover the price must be made at least $35 to $40 (18345 M$ to 20966 M$).

    Potential Buyers

    International Business Machines (IBM) - Is a company with a strong presence in Management Software with applications which already coordinate with blackberry. A takeover from would create synergies reducing costs, increasing sales due to a bigger client portfolio and even lunch IBM into the market of tablets and smart phones. (Most Probable)

    Microsoft (MSFT) & Nokia (NOK)- The partnership between Nokia and Microsoft is leading them to a campaign for increasing market share, and an acquisition by a joint venture would diversified the clients type and even allow Microsoft to expand their penetration in Management Software, join the best of Skype with Blackberry Messenger, and even come into the Tablet market with the best of three worlds. The only problem I can see with this Joint Venture Takeover is issues related with monopoly position in some segments. (Perfect takeover Strategy)

    APPLE (AAPL) - this acquisition would lead to an increase in market share around the world with a better penetration in the business segment and even a way to keep Apple's actual growth rate by renewing blackberry phones for IPhones (with bigger margins) and still get the possibility to provide all Apple users with Blackberry Messenger. (Unlikely, too proud to go with others)

    Amazon - Already Showed interest in acquiring RIMM in order to expand their activity and keep a strategy of selling their own products like is doing with Kindle Fire. (Maybe, but…)

    New Blackberry 10 and restructure of product lines, starts a new lifecycle on company

    New CEO (Thorsten Gerhard Heins) came from inside the company, he was the responsible for Product and Sales, this change will bring a new vision to RIMM more focus on sales. The new Blackberry will be released in the second half of 2012 and will be presented 02/27/2012 at Barcelona, Spain.

    This new Phone is a new fresh air, with new design in line with the market leaders, proving that RIMM is not dead and still is capable of innovation starting to distance from the old product lines we all know for years.

    A restructuring of product lines is needed, there are too many products, very similar to each other and this increase costs not allowing economies of scale in both production lines and publicity.

    The market of tablets is still growing and the Playbook is one of the cheapest in the market and was the most soled tablet in Canada on the last Quarter of 2011.

    If RIMM return to at least a net income of 1900 M$ made in 2009 the actual PER would be 4.20 (with Market Cap of 8000 M$), which is an excellent investment if we take in consideration that the Total Liabilities represent 27% of Total Assets.

    Company liquidated

    There is a scenario where we may consider closing the company and liquidating RIMM. If that happens how much will be delivered to the shareholders?

    We can't know for shore but we can estimate a value, assuming that all liabilities will be pay at account value (Total Liabilities 3840 M$ - Million USD), RIMM will have to sell all Current Assets which we consider to this calculation that are salable at their account value (Current Assets 7202 M$) and after that the Long Term Assets (6835 M$) will be sold at discount (-20%). The remaining amount is called the Residual Value which is the amount the shareholders will receive in case of liquidation of the company.

    Residual Value = -3840 + 7202 + 6835 x (100% - 20%) = 8830 M$

    Even in this case there is an upside because the actual Market Cap is 8000 M$.

    RIMM continues on losing market share and margins deterioration.

    The worst case scenario is everything to stay the same, sales continues to decrease as well as net income until the company starts having negative net income destroying shareholder value.

    Technically has proven a strong support on $14.50

    Source Bloomberg

    Disclosure: I am long RIMM.

    Themes: long-ideas Stocks: AAPL, AMZN, IBM, MSFT, NOK, BBRY
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  • Well done Tiago
    I would prefer short sell RIMM anyway.I believe your Residual Value will be negative in a couple of months, but a takeover makes some sense, though.
    29 May 2012, 10:28 AM Reply Like
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