When you’re short the stock of a company in deep distress, as I am with RIM, a Sunday night news release is not something to take lightly. Odds are it’s either going to deliver very bad or very good news. RIM’s announcement, in my view, is a harbinger of bad things to come.
The company still has a chance – perhaps a slightly better one, thanks to its new leadership – of turning things around and I hope it makes it. (Ideally, I would like to cover my short position one day and profit from a rebound.) But the latest developments bolster my belief that the next year or so is likely to hold a cascade of bad news.
Right now, investors are focused on Thorsten Heins, the new guy. The detractors say he’s a nerdy engineer, he doesn’t have the consumer touch, he’s unknown. These might be important points but they miss a much more discouraging signal, which is that RIM’s long-time co-CEOs Mike Lazaridis and Jim Balsillie are bowing out at this particular moment. While I’m sure they could feel the gentle hands of their fellow directors on their backs, do you really think they would hand over the reins if they thought the company was on the cusp of a turnaround?
Of course not. They’d want to stick around and reap the much-deserved credit, especially after the drubbing they’ve taken for their ham-handedness over the past couple of years. Who wouldn’t?
RIM has hemorrhaged market share because the competition has gotten better and faster, which is normal, and also because of its own missteps, such as pushing out half-baked products like the first PlayBook tablet. Its transition to QNX, a new operating system, is particularly worrisome. You can be forgiven for suspecting that the move isn’t going well. Otherwise, why the repeated delays?
This is, of course, just conjecture; outsiders never have the insights of CEOs, who get daily reports about what’s happening in research and development and sales and so on. That RIM’s veteran co-CEOs are walking out now suggests that they don’t see much light at the end of the tunnel and can’t muster the energy or conviction to push back against their critics inside and outside the boardroom.
For some investors the shuffle at the top doesn’t matter. They’re buying the stock on takeover hopes, and all it takes to fuel their emotions is a blogger who claims to have secret sources telling them Samsung is trying to buy RIM.
A sale is indeed possible at some point. After all, it’s pretty hard to be a $20-billion or $30-billion player when your competition – Apple, Microsoft, Google – have market caps 10 times bigger. But RIM has to turn itself around before it will be an attractive acquisition. Buyers don’t, as a rule, line up to purchase damaged and deteriorating technology franchises. They want either growing companies or ones, like Palm, that have hit rock bottom and can be scooped up for a song, simply for their brand name and customer lists. RIM is still somewhere in the middle.
Price matters. Samsung (which, for the record, denies it tried to buy RIM) is not going to spend $15-billion for RIM’s proprietary messaging service BBM, as the rumour mill suggested. You could replicate the service for a lot less.
That said, there is some good news beyond the change in leadership. Mr. Lazaridis says he’ll buy $50-million of stock. And value investor Prem Watsa has joined the board and says, “We’re going to look at doing the same.”
That’s not quite a ringing endorsement of the company’s value (although Mr. Watsa’s Fairfax Financial is already a sizable shareholder), so it’s worth watching both men’s insider trading reports over the next few months. They may buy more shares but that doesn’t mean it’ll be at the current prices. (Mr. Balsillie apparently doesn’t share the faith; at least, he hasn’t stated any intention to buy more RIM shares.)
Behavioural analysis is often more important than looking at the numbers, which in RIM’s case are pretty good. The behavioural read, in my opinion, tells a less promising story. A turnaround is still possible but it appears that there may well be more stock-withering news before that happens.
Fabrice Taylor publishes The President's Club investment newsletter, focusing on off-the-radar small to mid-cap companies trading at a discount to net asset value. His letter and The Globe and Mail have a distribution agreement. He can be reached at email@example.com.
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