Research In Motion At Waterloo: Prepare For Bankruptcy

| About: BlackBerry Ltd. (BB)
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Napoleon Bonaparte, who once lorded over all of Western and Central Europe, met his ultimate defeat at Waterloo. At Waterloo, it took the seventh coalition of 120,000 men from various European states to destroy the French Empire and divide its spoils amongst themselves. Although Napoleon died in exile years later, history has rewritten events to identify Waterloo as the literal death of a movement that destroyed itself through sheer arrogance.

Today, Research in Motion (RIMM) is fighting a losing war of its own at its Waterloo, Ontario headquarters. Behind its 1999 BlackBerry release, Research in Motion grew to dominate the mobile sphere throughout the early 2000s. The BlackBerry smartphone quickly emerged as the ultimate accessory for IT directors, corporate bosses, and chic upwardly mobile professionals. January 9, 2007, however, marked the beginning of the end for RIM. On this date, Steve Jobs unveiled his Apple iPhone that still reigns supreme as the leading attaché of opinion makers. In retaliation, Google, Motorola, Samsung, Microsoft, and Nokia were to join forces and war over what is left of the smart phone market.

Instead of changing course, Research in Motion executives have effectively pushed back their BlackBerry 10 release date to "Never." At Waterloo, the corporate scavengers will quickly begin to circle and fight over scraps amid this looming break up. Research in Motion is not a viable business in its current state. Bankruptcy and restructuring are inevitable.

The Rise and Fall of An Empire

The story of Research in Motion exposes the difficulties of technology and business cycle investing. For Alpha returns, a technology company must innovate must-have products that consumers never realized were necessary. Alpha businesses, such as Apple (NASDAQ:AAPL), create share out of nothing. Alternatively, corporations that maintain dominance above a specific niche may generate stable cash flow, but fail to sustain real growth. Microsoft (NASDAQ:MSFT) is an example of a beta stock comparable to a utility masquerading as a technology investment. Microsoft shareholders should be happy to merely keep pace with the S&P 500 Index and collect dividend payments.

Research in Motion may be described as a corporation that operates within the final omega stage before bankruptcy. This business is a one-trick pony that failed to integrate its BlackBerry technology within a closed suite of products, such as Apple's iPod, iPad, and iMac. According to CNNMoney's Michal Lev-Ram, Research in Motion shareholders paid the price for founders Mike Lazaridis and Jim Balsillie ignoring the Apple iPhone threat. Instead of reengineering products to meet consumer demand through quirky applications, RIM executives dug in their heels to pander towards white-collar professionals who they assumed were decision makers. Every other season, Waterloo pompously made attempts to force feed BlackBerry updates into the marketplace.

In April 2011, the RIM PlayBook went on sale, in response to the Apple iPad and tablet computing. The RIM PlayBook release proved to be an utter fiasco of nearly invisible market penetration, a $485 million write down, and the hijacking of a delivery truck in Indiana where 5,000 PlayBooks were stolen. For additional comic relief, Jesse Hicks' scathing article for The Verge details accounts of disorderly conduct (mischief, in Canada) arrests between brawling executives on Air Canada alongside a preposterous PlayBook security hack by the name of "Dingleberry."

The Bottom Line

In Q2 2008, RIM stock traded near $150. Today, Research in Motion shares change hands at $7.40. 2008 was especially brutal, as shares collapsed from $150 to $40 over the second half of the year. This awful price action reflects the fact that Research in Motion stock was deep into bubble territory prior to its final omega act. On August 17, 2009, a fawning Fortune magazine placed Research In Motion atop its Fastest Growing List. At the time, RIM had grown its year-over-year profits by 115 percent. Over the next two years, this hyper growth slowed down to 30 and 27 percent into 2011. That year, Research in Motion tallied $3.5 billion in net income. For the 2012 fiscal year, earnings dropped precipitously to $1.15 billion on $18 billion in revenue.

This earnings free fall, of course, continued into Fiscal 2013. In Q1 2013, ending June 28, 2012, RIM reported a net loss of $518 million. Amid the carnage, Thorsten Heins, President and CEO, announced another round of 5,000 layoffs alongside plans to hire investment banks J.P. Morgan (NYSE:JPM) and RBC (NYSE:RY) Capital Markets to review "strategic business model alternatives."

Strategic Business Model Alternatives

At $7.40, Wall Street has set a $3.9 billion price tag on RIM. As an acquisition target, RIM will be of little interest to Google (NASDAQ:GOOG) and Apple corporations that already dominate the smart phone market. As a potential partnership, the Microsoft - Nokia combination proves that merely throwing cash at a failing brand name is a losing proposition for all parties involved. With Nokia (NYSE:NOK) teetering upon the brink of collapse, The Wall Street Journal reports that Microsoft refuses to offer Windows 8 software updates on existing Lumia phones, while also agreeing to supply operating software to Huawei Technologies, a Chinese mobile phone company. Yes, Microsoft has inked deals to compete against its own Nokia partner.

At present, a deal for RIM's patent portfolio is also unlikely. In a September 2011 report, Jefferies analyst Peter Misek writes that RIM's patent portfolio would only garner $2.5 billion. Today, the patents are likely to fetch less than $2 billion on the open market, which means that any proposed deal would do nothing to salvage shareholder value. Google's August 2011 $12.5 billion acquisition of Motorola Mobility may indicate that it was mining for patents, but dismissed Research in Motion intellectual property as unattractive.

At this point, "strategic business model alternatives" would call for embarrassing debt write offs and the ultimate break up of this company at fire sale prices amid bankruptcy. All options are in play, including a division of the firm into separate hardware, software, and service divisions. In its latest quarterly report, Research in Motion accounts for $3.4 billion worth in net book value of acquired technology and intellectual property alongside $2 billion in land, buildings, and furniture.

At present, BlackBerry's weak 6% share of the smart phone market is under siege. Further, $2.2 billion in liquid cash and investments to cover $3.2 billion worth of current liabilities on RIM's balance sheet is little consolation for nervous shareholders and employees. Research in Motion is quickly running out of ammunition at Waterloo.

Disclosure: I am long AAPL.