Rumours of a Research in Motion Ltd. takeover are swirling, forcing analysts and investors to sort through the myriad strategies and motivations behind potential bids. But while each suitor has a different reason to look at RIM , they all face the same conundrum: how do you value the company, and what could you get away with paying?
At first blush, RIM’s market capitalization of around $7.5-billion looks like a sweet deal. If you take the company’s current assets and subtract all of the bills it has to pay, there’s already enough cash on the books and receivables to cover about half the takeout cost.
Add in RIM’s patents and its smartphone business, and there’s bound to be a big corporate valuation, right? Well, it depends on who you ask, and what numbers you crunch.
As analyst Kris Thompson at National Bank Financial wrote last week, the “sum of the parts valuation is in the eye of the beholder,” because there are so many variables.
Take RIM’s intellectual property. Mr. Thompson noted that it “may be worth more than $10 a share, or it may be worth less than book value of $5 a share.” (Before the Nortel patent acquisition this summer, he valued the IP at $5-billion.)
Then there are the problems with its bread-and-butter business: smartphone sales. RIM shipped 14.1 million BlackBerrys in the third quarter, but warned it was only going to ship between 11 million and 12 million units in the fourth quarter. Many people expect sales to continue slumping because the new line of BlackBerrys, which will have an upgraded operating system, has been pushed back to late 2012, and who knows if it could face another delay.
Analyst Peter Misek at Jefferies tried his hand at valuing this core operation, and what he found was a big mess. The business’s net present value looks a lot different depending on what figures you assume for things like annual subscriber decline. Back in September, he calculated that if you assume a 2 per cent annual subscriber decline, this business is worth $11-billion. If that rate jumps to 5 per cent, the NPV falls to $8.8-billion.
Because the valuations are all over the place, Mr. Thompson recommended avoiding the temptation to chase the company on hopes that its break-up valuation should support the stock.
“The valuation of RIM’s intellectual property is so wide-ranging that we can not comfortably recommend investors buy shares on this basis,” he wrote. On top of that, he believes that “RIM’s service revenue is entering a secular decline from carrier push-back and a subscriber base that will peak and start to decline. The thesis that RIM’s service business offers predictable cash flow into the future needs to be called into question.”
To get a sense of just how rapidly the sales outlook is hurting the business, this summer Mr. Thompson ran a back of the envelope calculation and estimated that the company may be worth north of $23-billion, or $43 per share. Now he, and so many others, aren’t so sure.