Research In Motion: Rest In Pieces
With unrelenting worldwide attention focused on the downward fortunes of Research In Motion, we’ve all witnessed the shock of seeing this one time national tech darling relegated to the point of near extinction less than four years. During that tumultuous time, the market value for RIM has astoundingly plummeted from $83 billion to less than $4 billion. There’s now serious doubt as to whether RIM can even keep the doors open long enough to see the severely delayed launch of its much-anticipated BlackBerry 10 next January, which had originally been slated for a grand unveiling by September of this year – although the company never made the actual release date known. Now it’s at least partially evident why.
Many investors have quickly lost both patience and confidence that the new management team will be any more successful than the previous regime, led by founder Mike Lazaridis and his right-hand man Jim Balsillie, based on the dismal results until now.
In a desperate effort to try and survive the downward decline and non-stop hemorrhaging at RIM, CEO Thorsten Heins announced 5,000 employees would be laid off following a $518 million quarterly loss, with the bulk of the firings coming at corporate headquarters in Waterloo, ON. Additionally, another 3,000 workers are losing their jobs with the shuttering of some of the company’s 20,000 retail stores across North America. Boston was the first confirmed closing.
Making matters worse, angry shareholders could well band together and bring forth lawsuits based on what they feel was misrepresentation on the part of company executives in failing to fully disclose the company’s actual predicament. Part of that misrepresentation likely to be held onto by investors would include a rosy statement Heins made to the CBC.
“There’s nothing wrong with the company as it exists right now,” he stated.
No sooner had he made that curious statement before doing a 180 in saying he’s not satisfied with the company’s performance while addressing angry shareholders at the company’s annual meeting in Waterloo – not “at” the Waterloo – yet. Maybe the leadership is what’s wrong. It seems incredibly strange for a CEO to make such divergent comments when his company has lost 95 per cent of its market value in such a short span of time.
It was a year ago when former co-chair and co-CEO Jim Balsillie assured investors that RIM’s decline was temporary and that a turnaround was imminent. Keep in mind that was when the company’s stock was valued at more than $30 per share; and now 12 months later, it’s been hovering near the $7 mark.
Prem Watsa, the high profile chairman and CEO of Fairfax Financial Holdings is staking much of his financial reputation on the line after increasing his holdings in Research In Motion to just under 10 per cent, which is about 51.9 million shares after filing with the U.S. Securities and Exchange Commission. That put his approximate investment at about $356 million at the time of the shares purchase last month.
There’s no doubt that having an individual such as Watsa outwardly showing that much faith in RIM and BlackBerry is a tremendous boost, but his timeline for a turnaround is admittedly anywhere from three to five years. What concerns other shareholders is that there’s a real fear the company may not have three to five months to turn things around.
In an interview with the New York Times, Jean-Louis Gassée, the former president of Apple’s products division and founder of software maker Be, mentioned the possibility of shareholder litigation.
“They’re going to get sued and they should get sued because I think a closer look at the record is likely to unearth knowing and willful misrepresentation,” said Gassée. “When the CEO says there’s nothing wrong with the company as it is, it’s not cautious, it doesn’t make sense.”
It’s been reported RIM has been seeking out advice on possible buyers – while there is still something to buy. It’s also not beyond the realm of possibility that the company could face a hostile takeover bid from any number of major tech companies who’d either like to get into the smartphone business, or at the very least, acquire the very attractive patents for the proprietary technology. The unofficial threshold for a takeover scenario has most often been connected with RIM’s stock price going below $10 per share – a territory it’s now resided in for quite some time. In an effort to save money, the company decided to sell off one of its two company jets.
South of the border, RIM suffered an almost 50 per cent sales plunge, leaving it more reliant on less stable markets such as Indonesia and South Africa. Total market share in the U.S. now hovers around 10 per cent with Apple’s iPhone and smartphones using Google’s Android software taking a huge bite out of BlackBerry’s earlier successes. The company has offices in at least 27 countries and sells phones in more than 175 markets and is going to need to hope sales improve in some of those secondary nations.
The next 90 days will be instrumental in determining whether RIM can stay afloat long enough to release its so-called Superphone early next year, and even at that, many financial analysts say it’s going to really have to knock the ball out of the park for the company to post a strong enough turnaround to survive beyond a brief reprieve.
Adding to the misfortune, a jury in California recently returned a verdict against RIM of more than $147 million in favour of Mformation in a patent case in U.S. District Court. As of publication, the trial judge had yet to determine certain legal matters that could impact the verdict. RIM is awaiting the judge’s assessment before deciding whether to pursue an appeal. Mformation is a leading provider of mobile device management technology servicing more than 500 million devices worldwide.
RIM is clearly in a very precarious situation and they’re in the throes of a massive restructuring and unbridled optimism that the BB10 platform is going to shoot the lights out and resuscitate the company. Coming out of the general meeting a number of shareholders say they just don’t believe the company is heading in the right direction.
Vic Alboini is Chairman, President and Chief Executive Officer of Northern Financial Corporation and Chairman and Chief Executive Officer of Northern Securities Inc., a subsidiary of Northern Financial Corporation. He’s never been shy about his feelings on RIM and what it should be doing.
“What came out of the meeting was a sense of continuing frustration and disappointment directly substantially towards the board,” Alboini tells us.
There seems to be a growing dissent for the longer-serving board members – those who’ve been there since 2007. That would of course not include newcomers Prem Watsa of Fairfax and Tim Dattels who just recently joined the board.
“If I was to categorize a theme it would be a desire to remove that board, or specifically those other directors. We think the board has to be revamped. Barbara Stymiest, who is the chair, confirmed that and agreed with that. The disappointment is that she’s been there seven months and we’ve had one new director.
The other disappointment for some key shareholders is that the new director didn’t replace an existing director but was added on, so at the very best there may be a slight dilution of the old way of thinking but it’s by no means been replaced. The omission in the management presentation in dealing with the serious strategic options also was deemed a major disappointment for some.
“I believe the shareholders want the board – and a new board in particular – to examine what the company is worth on a standalone basis and what it can be sold for,” Alboini says. “We continue to believe that it should be broken up and the parts sold or at least revived through strategic investments by major competitors.”
Some of those competitor companies on the landscape would include the likes of Microsoft, Apple, Google, IBM, Amazon.com, Samsung, SAP and Oracle. It’s Alboini’s belief there’s a deal to be had.
“There are lots of companies that would either look at investing in RIM or parts of RIM or for that matter buying it and that’s what has to be examined,” Alboini stresses. “There’s certainly no optimism that’s shared by the shareholders that BB10 is going to be the salvation.”
With the issue of who should be sitting on a revamped board brings about the question of whether or not the chair is qualified to determine who those individuals should be. Is Barbara Stymiest, a former banking executive and head of the TSX, capable of filling the positions at the table for this hi-tech company? If you’re asking Alboini, the answer is clear.
“I’ve dealt with Barbara when she was CEO of the TSX and I thought she had a pretty good career at the TSX,” Alboini points out. “It was mixed at the Royal Bank. I really don’t think the chief operating officer appointment worked and I think she was shunted aside as group vice president. But in any event, the bottom line is that she’s out of her element here. She is not a driver and has no experience in mergers and acquisitions.”
From Alboini’s point of view and that of a number of financial analysts it does indeed seem as if RIM’s situation is about M&A and if that’s the case, it’s essential to have the most qualified individuals at the top in leading the company down that path. It’s a company that’s scratching and clawing to save itself, shedding 5,000 jobs with about $2.2 billion in cash reserves to fall back on. However, it’s projected at least $375 million of that may be needed to pay severance to all those given pink slips in the latest purge.
“I think the cuts are going to have to go deeper to save the company,” Alboini states. “You’re also talking about trying to carve out where you stand in possible transactions or actual transactions with other competitors and they (the board) are not doing that. Our whole focus is that the BB10 platform can be shoot the lights out, it could be ho-hum or it could be a dud. You want to make sure you carve out transaction opportunities in anticipation of what BB10 may or may not do. Barbara – that’s not her landscape; she has no idea what to do.”
While the criticism sounds harsh, Alboini admits that solving such a crisis is by no means easy and not something very many people would be able to pull off.
It seems to be the lack of proper usage of investment banks that strikes a level of frustration amongst investors. Such banks make it their job to see what possible deals can be made between competitors in the marketplace.
“Right now the board is betting the shop on BB10 without getting any bids that would allow them to compare the relative values of their assets,” he says.
“That’s what investment banks do. They value the company, or parts of the company based on different scenarios and this management team and board are not doing that. There’s no way they’re not shocked by what’s happened in the last year. The stock was what, $30 in September and it’s just over $7 today. ”
Most analysts still seem to believe it’s too early for any vultures to swoop down and make a bid, but that could all change within the next few months if, for example, some wealthy U.S. activist steps forward to announce they’ve crossed the 5 per cent threshold, because at 5 per cent you are legally obligated to publicly announce in the United States. That being the case, they could theoretically start a proxy battle or make a bid for the company.
Director Prem Watsa, CEO of Fairfax Financial Holdings recently announced he was increasing his stake in RIM to 10 per cent, making him the single largest shareholder in the company.
“Prem Watsa could make a bid,” Alboini stated. “Fairfax and Prem Watsa are focused on a three-to-five year creation of long-term shareholder value when they make an investment and they’ve articulated that in the case of RIM. Unfortunately, we’re talking three to five months – not three to five years. That’s part of what scares me; when CEO Thorsten Heins went on his recent publicity tour saying everything’s fine and it’s about creating long-term shareholder value. That doesn’t come from him – it comes from Prem Watsa. If the board is thinking they’ve got this open licence to do the best job they can over the next three to five years, this company will be absolutely dead in the water – if that’s what the board thinks.”
‘Ineffective’ Management and Directors
There is a perception by many on the outside looking in that the replacement of Mike Lazaridis and Jim Balsillie as co-CEOs and co-chairs in favour of Thorsten Heins back in January was nothing more than rearranging the deck chairs on the Titanic. Heins had been with RIM for five years and was part of that former inner executive management circle. Because of that dynamic, there have been allegations of this being a puppet regime by institutional shareholders and high net worth investors at the annual general meeting earlier this year.
“The lack of credibility is a major theme and that relates to the performance of the board,” Alboini says. “When you talk about the themes coming out of the AGM, it was my first time to see Thorsten Heins in action and I can tell you he is not CEO material. There is absolutely no doubt in my mind about that. He is may be a good COO and engineer but there’s no way he should be CEO. They need a transformational leader, not a transitional leader. He’ll be gone in six to 12 months, if he’s not turfed-out earlier on a takeover bid or a proxy contest. There’s no question, he’s history in my view. He can’t connect with his audience and is not the visionary to take the RIM shareholders higher.”
“Barbara doesn’t belong, Thorsten doesn’t belong and you’ve got to get rid of all the board members who joined in 2007,” Alboini flatly states. “(Director) Roger Martin is a disaster, unfortunately. As the dean of business school he’s got this corporate governance program and, my gawd, he’s been the worst at corporate governance on this board. This whole thing is embarrassing.”
“We’ve been kind of a rabble-rouser – a mouthpiece,” Alboini admits. “But we’re not looking for publicity. We want to make money on our stock.”
Breaking the company up into two or perhaps even three sections may be the company’s best hope for long-term survival. If broken into two sections it might be handset and software and services, or the latter two could be separated to form three units. It would be interesting to know what those distinctly separate units would be valued at in the public domain. The handset side could be BlackBerry Inc. (or something to that effect) and there’d be RIM Mobile Management Inc. which is the enterprise side. It would be interesting to know from investment banks what the value of the enterprise unit would be on the open market especially if the software became compatible with Android and Apple (iPhone) users.
American venture capitalist Mary Meeker has stated the number of smartphone users in the world is going to explode to 5.7 billion within five years. While that number may be a tad aggressive, the point is that smartphones are fast becoming the most important asset for many people around the world.
“If you’re an Android or iPhone user, if you can get a BlackBerry app that would give you access to the encryption, data compression, the push email and the BBM, would you sign up for that at $30 a year,” Alboini ponders. “Right now they’re getting $60 a year but that number is going to come down as it opens up.
So could you go from 78 million (the current RIM totals) to 300 million? That’s not even 10 per cent of 5.7 billion.”
The QNX software purchased by RIM will provide the backbone for BB10. It’s been used in power plants and air traffic control centres and its power is truly amazing. Embedded connectivity with the home and household appliances is at least part of what RIM is looking to integrate within these devices but putting it all together from a technological point of view is a herculean task, and thus the delay in its launch from the original September timeline which has now been pushed back to this coming January.
“It could be appliances and alarm security systems,” Alboini theorizes. “You could be down in Barbados and watch who’s coming to your front door. I think they are going that extra mile. My concern would be that we could come up with the regular BB110 phone which has the same features as before but somewhat enhanced and we can do that in six months or we can wait 18 months for the enhanced. I’d rather go with the six months and get something out there. My marketing sense tells me to have the enhanced version be released as a Version II.”
Footnote: Alboini was recently cited by the Investment Industry Regulatory Organization of Canada (IIROC) as having engaged in “conduct unbecoming or detrimental to the public interest” in connection with obtaining credit for his client Jaguar Financial Corp. A hearing is scheduled for Oct. 11.
Financial expert Marvin Ryder is a faculty member of the DeGroote School of Business at McMaster University. He’s not surprised that Prem Watsa recently dramatically increased his stake in RIM.
“You have to look at RIM as going down a road that has a fork in it and we don’t know which fork they’re going to take,” Ryder analyzes. “There’s a road that RIM wants to take that says we’ve got this wonderful new software that we bought from QNX for the BlackBerry 10 system and under Mr. Heins they finally committed a date saying these phones are coming out in January. And when you see this software and when you see these phones you’re just going to think this is the best thing ever and rush out and buy them, and RIM would be back.”
The problem has been the ability to integrate this powerful software with their new smartphone and in hindsight it would have been better if the public hadn’t known when the devices were going to be ready, because it served as a major letdown for consumers and has been reflected in the share price. Another problem facing the company is that we’re into August and many people are in need of upgrading their phones. Are loyal BlackBerry supporters willing to plug along with their current devices and wait until BB10 is ready five months from now, or will they move on to the next manufacturer, such as Samsung or Apple?
That’s the question nobody really knows.
“Here’s what I expect you’re going to see, probably starting next month,” Ryder says. “You’re going to see deals where RIM will tell consumers they can buy a current phone and they’ll get a coupon for a free upgrade or 50 per cent off a new phone in January to keep some sales happening over the next five months, otherwise why would anyone buy? The worst case scenario is nobody buys anything for five months.”
Such a scenario would at least keep sales active but would result in shrinking margins, meaning that in all likelihood the next two quarterly reports are going to be rough for RIM with the share price ticking downwards.
“By Christmastime I think it could be in the $4 range,” Ryder speculates.
The January launch of the much-anticipated BB10 “super-phone” will trail the release of the iPhone 5 and the Windows 8 phones are on the market and that’s considered a major setback in some regards with the danger being that those competing devices may well have many of the same features being secretly developed for BB10. At the very least, you can rest assured Apple won’t be releasing a brand new version of the iPhone without a plethora of fantastic new options to play with.
At the end of July, RIM announced it unveil its 4G LTE BlackBerry PlayBook tablet with built-in support for cellular networks.
Survival: Rest In Pieces?
Ryder also agrees with the assertion that there’s a strong possibility RIM may either be broken up into two or three pieces in order to survive and evolve down differing paths. One piece would be hardware; a second piece would be software; and a third piece would be the networks.
“I wouldn’t be surprised to see RIM get out of the hardware business,” Ryder opines. “It’s almost the reverse of Google which for the longest time was not in the hardware business but only sold software for the Android phones but it was third parties who made the phones. You could very well see RIM licence its BB10 operating system to third parties, get out of the hardware business altogether and still run their networks.”
Another valid concern Ryder points out is that what engineers find interesting and what the average consumer finds useful may be worlds apart. He speaks mainly of Mike Lazaridis, who was the technical guru who launched this system. Not having any new products in such a prolonged period of time is also extremely troubling.
“An engineer who designs products for engineers can get all excited about things the consumers could care less about,” he notes. “Technologically it might be a wonderful phone, but if it doesn’t appeal to the consumer then the company could die.”
Packaging and image are important to consumers. Knowing your customer is important, and sometimes a purchase decision can come down to something as trivial as the colour, which no doubt drives the engineering segment crazy.
A year ago when RIM stock was hovering at around $30 per share there were concerns about the company’s direction but at no point was a hostile takeover part of anyone’s thought process. A number of analysts believed the company would become vulnerable once it went under $10 per share, but it’s gone below $7 and still no action from the outside. But it’s going to get to a point where the management team will only be able to keep things together so long if the stock keeps falling. It would seem the vultures have stayed away for the simple reason they believe that the stock price will drop even lower yet, so they want to get it for the best price possible. The only downside to that is if a company genuinely wants to buy the assets, they could overplay the waiting game and be circumvented by another player in the game.
Oracle has been rumoured as one possibility, but it would mean vastly moving away from their core business. Amazon.com has an interest in the phone market, but word is it’s going to be on a far more limited basis, offering cheaper phones to the marketplace without the hi-tech gadgetry associated with smartphones such as the BlackBerry and iPhone.
“If you ever thought you wanted to buy RIM, November or December of this year would be a prime time to throw an offer on the table,” Ryder remarks. “It would be a hostile offer because the current board has said they’re quite committed to the strategy they’ve got and what will help you is that you’ve got a whole boatload of disgruntled shareholders. If you put the right number on the table you could see an interesting fight for control just before Christmas.”
Can RIM survive long enough to get their super-phone to market? Time will tell.
“They’ve lost so much credibility in the marketplace we just can’t take them at their word,” Ryder says. “Meanwhile the juggernaut, which is Apple, is going to have their iPhone 5 and will tell the world theirs is the phone people need.”
Despite the massive erosion at RIM, Ontario’s information and communications technology sector continues to prosper, employing nearly 270,000 Ontarians and contributing about $28.4 billion to the economy annually.
There’s also been significant investment from global companies such as Siemens, Intel, Google, IBM and Cisco, which is reason for optimism. Additionally, there were about 18,000 information and communications technology firms in Ontario in 2011, up 3.1 per cent from 2010. Last year, Toronto ranked fourth in the world as a top tech hub for software start-ups behind Silicon Valley in California, New York City, and London, England.