- Apple may consider BlackBerry at the company's current valuation, which is 97% below its peak in 2007.
- BlackBerry currently services the corporate security-oriented customer segment, which may be the most attractive synergy for Apple.
- BlackBerry stock is currently trading near the mid point of its valuation using a DCF model.
Apple, Inc. (NSDQ:AAPL), currently the world's largest company, is an innovation machine. This past decade has witnessed the rise of a true consumer goods juggernaut, and the subsequent decline of once-famous competitors such as BlackBerry Ltd. (NSDQ:BBRY). The introduction of the iPhone in 2009 and the subsequent release of newer models with better applications and features has seen Apple's market share climb to around 16% today. Undoubtedly, newer designs and more innovation will bring more market share, no?
Apple's stock has recently come under fire from investors who see a potential slowdown in Apple's revenues and profits in the future. While the markets for Apple products are nowhere near saturation, theoretically such worries make sense - it gets incrementally harder and harder to grow the larger the company becomes.
Besides growth expectations, I see the following as the primary reasons why an Apple acquisition of BlackBerry makes sense.
The consistent decline in sales, market share, and stock price makes BlackBerry an attractive target. The once-mighty BlackBerry, which held over 50% of the global market share for smartphones, traded at $230 per share. Today, the stock price is closer to $8 - a full 96.5% drop in value. This rapid loss in shareholder value inadvertently makes BlackBerry a prime acquisition target, since large Canadian stakeholders (pension funds, banks, etc.) of BlackBerry have links to the Canadian government, who may have a vested interest in seeing these stakeholders compensated fairly in the short-term, providing little opposition to such a takeover if enough value is presented to the shareholders who stuck it out.
BlackBerry Has A Different Target Segment
BlackBerry's core business focuses on corporate clients and other security-oriented organizations, a much different market segment than the mass consumer market which Apple, almost exclusively, caters to. The end of fiscal year 2016 saw BlackBerry launching several new services and features, including a voice-encryption product for Enterprises (SecuSUITE) and a new professional cyber-security services division which will further enhance the company's security portfolio. The patents alone, to develop and integrate many of these features, hold real value to an acquirer that may be able to integrate such features into its own technology.
What BlackBerry brings to the average paranoid consumer is a double-dose of security. Widely considered to be the most secure of smartphone devices, heads of state all around the world use only BlackBerry mobile phones due to the company's security software and intellectual property, oft-considered to be the company's most valuable assset. This stronghold on the "secure smartphone" market may continue to gain importance, especially considering many of the recent security-related events involving Apple's battle with the FBI over the San Bernandino shooter's iPhone. Commenting on the hack that unlocked the San Bernadino shooter’s phone, one analyst recently stated, “…it is unknown how the hack operates or whether the hackers sold the flaw to any other agencies or third-parties, but if it is not disclosed to and fixed by Apple, it could leave anyone with an iPhone without a fingerprint sensor at risk of having their smartphone hacked (The Guardian, April 13, 2016).
Who Else Might Be Interested?
Interestingly, one major financial player did make a move for BlackBerry. In September of 2013, Fairfax Financial made a tender offer of US$4.7B to acquire BlackBerry after increasing its stake in the company to 10%. Instead of acquiring BlackBerry at that time, Fairfax Financial decided to purchase US$1B in convertible debt in November of 2013, with additional purchases thereafter. This offer may be considered to be generous today, given that the company's revenues at that time were substantially higher than today and the company has drastically fallen from grace, even more than before.
Another attempt was made to take a run at BlackBerry in 2015 when Microsoft retained Goldman Sachs and Deutsche Bank to begin an evaluation of the company. Microsoft had previously purchased Nokia's devices division for $7.17B, and was attempting to build its IoV (internet of vehicles) competency and expertise in mobile solutions to take advantage of an emerging market for the IoT (Internet of Things) and IoV.
Both attempts to buy BlackBerry were unsuccessful, though other rumoured "dance partners" for the company have included Chinese manufacturers such as Lenovo, Huawei, and ZTE. These companies have done well in the low-end device market, and BlackBerry has surprisingly performed quite well in the low-end market with its BlackBerry Curve smartphone. No bids have been placed, and the likelihood of an offer from these manufacturers remains quite low.
What is BlackBerry Worth Today?
The valuation of BlackBerry as a standalone business ranges between $7.60 and $8.60 based on a long-term growth rate ranging between 1.5% and 2.5%, with a WACC of 8.1% using a DCF model. The valuation assumes the business can grow faster than the current projection by about 2%, which is a fair increase in growth due to the acquirer itself. Other assumptions include a range of between $1B-$2B in synergies which will be gained through the acquisition, as well as a full depletion of hardware revenues, with a larger increase in software revenues post-2018.
If Apple felt confident enough in its ability to achieve the synergies necessary to make a BlackBerry acquisition meaningful, and the Canadian government is amenable to "green-lighting" this buyout, the concept of an Apple-BlackBerry deal should not be considered so far-fetched. The IP and security software platforms of BlackBerry combined with the different corporate customer target segment may provide Apple the potential "shot in the arm" analysts and shareholders are looking for, spurring additional growth. BlackBerry stock is currently trading near the centre range of their DCF valuation with conservative assumptions, so the timing may be just right. Maybe.