A Kink In Any RIM Deal

In an interview with the Globe & Mail, Prime Minister Stephen Harper hinted that the Canadian Government might step in should a deal for RIM involve foreign investors. Any deal over a set amount can be reviewed, and stopped, if it is isn’t a “benefit for Canada”. In the article, the Prime Minister didn’t say outright they would block some kind of foreign takeover, or foreign purchase. But, if you read between the lines, the message seems clear: the new owner had better make the government happy, and their preference would be a Canadian owner, and one that keeps the company going.

Building a Viable RIM?

This line of thinking assumes RIM can be viable in some form. There are two pieces that I think could be built upon (Blackberry Messenger and the Enterprise Server/Internet Service infrastructure). If RIM were to switch to Android, build good-quality handsets, but licence these two key technologies (or sell them as services on Android and iOS), then there might be something there. But (this is a big but) it would mean a considerable change in staffing levels. To work, they would also need to bring in top-notch industrial designers and a very talented marketing team to rebuild the brand. I think part of the branding job would be to drop the “Blackberry” name for the devices (keep them for the two services). The name has too many negative connotations. Sure, it’s recognized, but not for the right reasons. It’s “old”, it’s “stodgy”, it isn’t current, trendy, contemporary or “hip”. The company also needs to do a far, far better job of working with the developer community, and the need to make a viable ecosystem for the device. A switch to Android would be a giant leap in improving that ecosystem, giving them access to a large pool of developers and the apps they have built.

So, for argument’s sake, let’s say that RIM could be rebuilt with new Canadian ownership and a rebuild of the team from top to bottom. Who in Canada could afford it? RIM currently has a market cap of $8.8 billion.  Assume some kind of premium on the shares, like 5%, and you’ve got a $10 billion dollar company to buy. Yes, you could argue that RIM’s price should be discounted, considering their sorry shape and the need for new owners to put more money into the operation. But I suspect that any bid that doesn’t come with a premium will attract negative attention from the government, even if it is a domestic investor.

What individuals, companies or investor groups in Canada would want to spend $10 billion (or even have $10 billion to spend)? Sure, Caisse de Depot or Ontario Teacher’s Pension Plan could probably afford them. But would they really want to take on the risk? Other potential buyers could be Bell Canada Enterprises, Telus, Shaw or Rogers. There are private equity groups like Onex, but I’m not sure that a $10 billion deal is within their reach. Besides, none of these groups can offer much more than money, and RIM could use more than just cash. I could see the wireless providers being accused of all kinds of nefarious deeds by the other carriers if they also built handsets. What RIM needs, though, is not just access to money, but talent. The company will need a board that can offer guidance in manufacturing, consumer products, marketing and branding. Again, a makeover will be needed from the CEO on down, and I just don’t see how we can get that domestically.

If a Canadian owner simply tries to maintain the status quo, or only makes minor changes here or there, then this would be $10 billion down the tubes. It would be faster and less aggravating to put the cash in a big pile and light it on fire. More money without significant change in RIM will not prevent it’s impact with the ground.

But Foreign Investors?

Assuming that any foreign investor would be required to rebuild RIM, then the outlook could be a bit brighter, but only just. Having access to a much broader pool for quality directors and resources to help with the all-too-critical branding and marketing effort, industrial design and beefing up the ecosystem could help turn things around. They are necessary, but only time will tell if they are sufficient. I would say the odds are better, simply because there are more potential bidders outside Canada than in. It doesn’t mean there are any realistically. If the condition for government approval is “keep RIM going”, then the list of bidders would drop dramatically. That would effectively take Apple, Google, Nokia, Microsoft and Samsung off the table. Their primary interest isn’t having another product line. Their interest would be in the IP portfolio. Google just bought a handset maker, so it doesn’t need another one. Apple already has a viable hardware and software business, so a RIM play would be purely defensive. Nokia doesn’t need RIM for the factories, and Microsoft would likely be too wary about scaring the few handset makers (and their close partner, Nokia) willing to take a chance on Windows Phone. Samsung, given their proclivity for platforms and models, might keep it going, at least for a while. But that would likely be temporary.

My worry is that new owners, foreign or domestic, that are required to keep RIM running, and not just subsume it into their own company (basically abandoning Waterloo), won’t really make a difference. If the assets can’t be sold for a decent price while the company is still working, then the assets will get sold during the bankruptcy, and that’s an area where federal interference could be harder but also a waste of time. When the courts and a trustee are breaking up and selling off the pieces, there’s not much that can be done.

Other Ramifications?

Another possible wart on any interference by the federal government are lawsuits from current shareholders who believe that the government is harming the value of their property. The two largest outside shareholders are Fairfax Holdings and Primecap Management (each with just over 5% of the company). Fairfax is a Canadian company, but Primecap is an American organization, and they might not be afraid to fire up the lawyers. Jaguar Financial Corp has been quite vocal, and has claimed to have support from shareholders representing 8% of the ownership. They could push for compensation if government intervention causes what they believe is a drop in value of their asset. This is a wildcard that could make any transaction even murkier.

Ultimately, though, the threat of interference from the Canadian government would throw a lot of cold water on any deal with RIM. A revamping and rebuild of the company is a long-shot proposition, and one that would take a few years to sort out. This isn’t a quick fix, lets-get-it-repaired-in-2-quarters kind of problem. It isn’t that RIM can’t be fixed. I believe that it can, but only with a truly radical makeover. Simply trying to do “more of the same, just a little different” isn’t enough to go up against the iOS/Android juggernauts. Being “technically better” doesn’t matter either. It is about being “good enough”, but offering value or differentiation that matters to the consumer, enough for them to abandon their current investment in apps (and in some cases content) to want to switch. That’s a tall order, and a new OS no one cares about isn’t the solution (neither are cutesy cartoon characters or hipster music people).

Any short-term value for the shareholders would be a sale, and the best value in the shortest amount of time is a sale of the company for it’s IP portfolio to other handset makers and technology companies, all of whom are foreign owned. Long-term viability means $10 billion or so up front (to buy the company), another $1 billion or so to revamp and remake the organization (although a chunk of that would come out of the current profit stream), and several years before any results take hold. But it would also mean abandoning a software platform that is being ignored by consumers and developers, and focusing on the high-value assets (BBM and BES/BIS), and rebuilding the design and marketing side of the equation. That is a very, very tall order.