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Is Samsung's Potential Blackberry Acquisition Mutually Beneficial?

|Includes: BB, Samsung Electronics Co., Ltd. (SSNLF)

Summary

Rumors have been flying for a couple of weeks that telecom industry giant Samsung (PINK: SSNLF) is set to acquire old-time smart phone company BlackBerry (NASDAQ: BBRY).

BlackBerry has been struggling over the course of the past few years with the rise of Android technology.

The offer could thus provide for a resurgence of BlackBerry technology and lead to a potential turnaround for BlackBerry in terms of growth.

Samsung will benefit from the stability in terms of gearing and liquidity which BlackBerry brings. Moreover, Samsung stands to gain mainly from BlackBerry’s highly reliable security platform Knox.

The deal is definitely giving both companies what they want and does stand to be mutually beneficial.

Rumors have been flying for a couple of weeks that telecom industry giant Samsung (PINK: OTC:SSNLF) is set to acquire old-time smart phone company BlackBerry (NASDAQ: BBRY). The deal is reported to be worth around $7.5 billion. If BlackBerry's current share volumes of 529 million are taken into account, the deal is worth $14.19 per share, representing a premium of almost 42% on BlackBerry's current share price of $10.03. Samsung does not intend to takeover BlackBerry, its intentions are more along the lines of mutual cooperation. Samsung hopes for a potential use of BlackBerry technology for its own phones. Samsung also hopes to gain access to BlackBerry's state of the art (and as yet not breached) security network. Thus both companies do stand to gain. BlackBerry's investors seem pretty keen on a potential deal as share prices rose sharply by almost 30% when rumors surfaced and fell by almost the same proportion compared to which they rose when BlackBerry denied the acquisition rumors.

BlackBerry in focus (what BB will gain)

BlackBerry has been struggling over the course of the past few years with the rise of Android technology. The company's revenues as well as earnings have been consistently declining, with fiscal year 2014 being a particularly terrible one for the company. The company reported net losses of $5.9 billion for fiscal 2014, growing almost 9 times as compared to losses of $646 million in fiscal 2013. Expenses have remained relatively steady while revenues have declined sharply. Revenues have been falling at an accelerating rate. Declining revenues can be attributed to the rise in the popularity of Android phones. The Samsung deal could potentially allow for the use of BlackBerry technology in Samsung phones which are among the best in the world currently and are becoming increasingly popular with the masses. The offer could thus provide for a resurgence of BlackBerry technology and lead to a potential turnaround for BlackBerry in terms of growth. The deal is roughly the amount of BlackBerry's total asset value which stands at $7.55 billion. Although there is no goodwill to be gained from the deal, it does present a premium of $4.16 per share over the company's current share price and investors will surely gain. Investors have been losing their faith in BlackBerry but have indicated that they will be more confident in the company going forward if a deal is in place. Moreover, Samsung has considerable asset power as well as market power, it is trading at 8 times its earnings. The company does have what it takes to generate a turnaround for BlackBerry.

What Samsung will gain

Although BlackBerry has been performing poorly in terms of profitability, its liquidity position is highly stable with a current ratio of around 2.8 and more importantly, a cash ratio of 1 indicating the company is sufficiently liquid, and has done well in terms of liquidity management. BlackBerry's liquidity position is supplemented by a strong debt management system and relatively lower debt collection period. Moreover, the company has a debt to equity ratio of almost 0.5 showing that the company remains considerably stable and has a much lower burden of debt, looking ahead, it can be said that despite rapidly declining profitability, Blackberry still has strong foundations and the means to survive. Samsung will benefit from the stability in terms of gearing and liquidity which BlackBerry brings. Moreover, Samsung stands to gain mainly from BlackBerry's highly reliable security platform Knox. Samsung has been facing declining market shares in China in particular showing an almost 7% decline over the previous 2 years. Samsung has suffered as its phones' security features have been highly criticized and with cyber breaches on the rise, the company needs a proper security platform in order to secure its devices and negate perceptions. The company will thus benefit in terms of market share as well. Mobile revenues account for almost 50% of Samsung's revenues and a more secure platform will allow for revenues to increase and market share to be retained. Samsung stands to gain a potential $500 million from the acquisition in terms of the discount it might get. The move signifies a potential upside for Samsung's stock which is currently overvalued. Investor confidence will surely grow if Samsung is able to offer more security for mobile devices.

Conclusion

Samsung's acquisition of BlackBerry could prove mutually beneficial for both companies. Although BlackBerry is currently stable in terms of its liquidity and gearing position, demand patterns are definitely not on their side and will continue to act as headwinds for the company's growth. Pressure on liquidity will increase as a result and debt burden will rise. BlackBerry needs a boost in terms of its revenues as well as earnings, whereas Samsung needs a security platform along with stability in order to increase market share. The deal is definitely giving both companies what they want and does stand to be mutually beneficial.

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