RIM: The Fight for Redemption
In the volatile, cutthroat world of modern technology, where competitive success is driven by a company’s ability to constantly evolve and move forward without the tiniest of missteps, Research in Motion is now banking its future on some major changes at the top of its corporate ladder in an effort to regain investor confidence and get the technology giant back on track. The firm, which hit a peak value of almost $83 billion in 2008, has seen that number recently plummet to as low as $9 billion. Metaphorically speaking, the company that once walked on water has been relegated to slogging through mud puddles, resulting in a very unpleasant journey for investors each step of the way.
What was once an unthinkable restructuring scenario finally played out on Jan. 22 after months of speculation when co-CEOs and co-chairs Mike Lazaridis and Jim Balsillie both resigned their positions. When the announcement that 54-year-old Thorsten Heins would be taking over as President and CEO and retired RBC executive Barbara Stymiest would be assuming the role as chair of the board of directors, the immediate shareholder reaction was underwhelming to say the least. In fact, on the Monday following the weekend announcement, shares of RIM dropped nine per cent or $1.57 from the previous close on a trading volume of 6.7 million shares on the Toronto Stock Exchange, which translates into a solid thumbs-down. Comparatively, earlier false rumours of Samsung stepping in as a potential buyer drew far stronger positive reaction on the markets with a five per cent spike. Samsung spokesman James Chung quickly denied the rumours of any interest; nonetheless, a number of business analysts believe there was more than a kernel of truth to the story and so there may be more where that came from.
Heins is a former Siemens executive from Germany who has risen steadily through RIM’s upper management ranks since joining the company in 2007. The question now is whether or not this structural change will be sufficient to stem the tide of negativity which has set in with investors. What the firm really needs is the time to get its so-called Superphones out onto the market and hope they’re met with an overwhelmingly warm endorsement from the public. Lazaridis and Balsillie have both been staking the future of the company on these new devices.
The 55-year-old Stymiest has served on the board of directors for the past five years and has three times been named to Fortune’s 50 most powerful women in business. She was also the one-time head of the Toronto Stock Exchange. But despite her impressive resume, there’s a noteworthy degree of skepticism as to whether or not she’s an ideal replacement as chair. Bankers are not typically known for their risk-taking, and questions have been raised about her technical wherewithal, but the appointment could be defended as a sign of stability and that she’s an independent board member.
Soon after the announced changes at the top, Lazaridis issued a media statement indicating his continued belief that the company is moving in the right direction.
“I am so confident in RIM’s future that I intend to purchase an additional $50 million of the company’s shares,” he said. “There comes a time in the growth of every successful company when the founders recognize the need to pass the baton to new leadership,” Lazaridis continued. Balsillie, as expected, echoed much of the same as his long-time friend and business partner. “I have complete confidence in Thorsten, the management team and the company,” he said. “I remain a significant shareholder and a director and, of course, they will have my full support.”
Also confident of a turnaround is Fairfax Financial Holdings Ltd., the Toronto-based insurer run by Canadian Prem Watsa, who has at times been compared to Warren Buffett thanks to some of his favourable investment results. Watsa, 61, joined RIM’s board of directors during the Jan. 22 shakeup. Fairfax has since doubled its stake in the company to 5.12 per cent. According to Bloomberg Financial, the largest current shareholder in RIM is California-based Primecap Management Co., with a 5.5 per cent stake. Lazaridis is at 5.4 per cent and Balsillie 5.1 per cent.
As part of the group interview announcing the changes, Heins made it abundantly clear his immediate concern is to sell RIM’s BlackBerry 7 touchscreen devices and deliver on a promised software upgrade for its PlayBook tablet computer. Coming later in the year will be the launch of the next-generation BlackBerry 10 phones. In other words, his plan is to chart the same course as that of Lazaridis and Balsillie; albeit a different voice. No doubt it’s also the primary reason why immediate investor reaction was so unenthusiastic on the markets.
If this corporate shakeup doesn’t push the company in the proper direction, it appears as if RIM would be of profound interest to the likes of Microsoft, Oracle or Amazon.com should discussions of a takeover once again rise to the surface. A number of companies will be watching the developments over the next eight to 10 months very closely. Streamlining operations and focusing on core business initiatives is another aspect many disgruntled investors have been seeking during the spiral downwards, in what resulted in an obvious loss of faith when it comes to the leadership of Lazaridis and Balsillie.
Speculative rumours began as far back as the spring of 2011, but the first real warning sign came last June, when the Waterloo-based company announced expectations for a quarterly revenue drop. That troublesome public statement was followed up in July with 2,000 layoffs, the largest in the company’s history.
While we’ve all witnessed the humbling decline of RIM during the past eight months, the question now is whether these changes at the top will make any appreciable difference over the long haul or if it’s a Band-Aid solution to a broken leg. A great deal of the damage has been inflicted by the combination of a lacklustre marketing campaign and a dearth of new products, and by extension a drastic drop-off in public opinion, which in turn has led to a sharp decline in the sale of the BlackBerry and PlayBook devices. Savvy consumers have obviously been wary about purchasing expensive communications packages from a manufacturer in such dire straits.
RIM has continued in its efforts to turn things around and regain the public’s confidence. There was the unveiling of the improved BlackBerry PlayBook tablet in Las Vegas last month, but these new additions to the OS 2.0 software should have been part of the original package when customers first purchased the product—not months later as part of hurried, frantic fix. Due in large part to the stumbling factor, the PlayBook is currently nothing more than a weak rival to the industry leading iPad manufactured by Apple Inc. Android, engineered by Google, holds down the second spot, with the PlayBook relegated to a distant third.
Just how large is the discrepancy between the PlayBook and the iPad? For the last reported quarter, RIM shipped out about 150,000 units of the PlayBook, while Apple Inc. sold in the neighbourhood of 1.1 million iPads. One major faux pas that kept potential customers away in droves was the failure of the device’s original release to have built-in email made available. That problem was addressed with the recent upgrade, but it was about nine months in coming. With iPads and numerous users of Android on the market, countless sales opportunities were lost.
Lazaridis, who turns 51 on March 14, and Balsillie, who is 51 as of February 3, had served as co-CEOs and co-chairs since Balsillie joined RIM in 1992. Lazaridis is the technical guru who founded the company in 1984, with Balsillie handling the marketing. Combined, they currently own 10.5 per cent of the company’s shares, with the other 89.5 per cent in the hands of many other investors. But neither has had any formal training as a CEO, and yet they both continued to hold down the huge shared responsibility, up until the recent hastily-made changes. Both are seen as strong candidates to headline a start-up, as they’ve proven they are quite capable of doing; but handling a workforce of 20,000 is a different matter altogether.
Marvin Ryder is a professor with the DeGroote School of Business at McMaster University. He says the very seldom-used corporate setup just isn’t something that sat well with investors.
“There is an inherent conflict of interest when the CEO serves on the board and as well the chair of the board,” Ryder notes. In fact, Ryder correctly predicted one or both of them would quite likely be replaced sooner rather than later, during recent discussions with CBJ.
A valid question being asked by some shareholders is whether or not Heins truly will bring in his own way of thinking in terms of leading the company down a new path, or if he’ll merely provide a continuation of the same business philosophies that have been orchestrated by Lazaridis and Balsillie before him, having been on the inside with them for the past four years.
“I understand that concern, but people also need to realize RIM is in the midst of a significant product development to be announced in the second half of 2012,” Ryder offers. “If you were to bring in someone totally new from another company they would need three to four months to get up to speed. This upcoming product launch is so mission critical to the company, love it or hate it, RIM has bet the company on this new line of Superphones. To then bring in a new CEO who needs additional time simply wouldn’t work. I’m not too worried about Mr. Heins being a puppet. Keep in mind you have an independent board run by a new person and Mr. Lazaridis and Mr. Balsillie don’t have any day-to-day responsibility.”
No matter how the installment of Heins is initially perceived, there is the unmistakable task of being able to produce on time and on budget, and that is the basis to which he will ultimately be judged, all the while being tethered to a very short leash. If he can’t deliver soon out of the gate, we’re looking at nothing more than a transitional CEO and board.
“For the stock market, we need to see these products come in on time and truly be super,” Ryder declares. “If he does that, then we’re going to consider him the next great step in RIM’s history. If he doesn’t, I think a year from now you might be hearing about another CEO in the company.”
Despite the goodwill intent, there’s no shortage of critics who wonder whether the moves are too little, too late. You can count business analyst Michael Urlocker of GMP Securities among that group of skeptics.
“I am not sure that an engineer as new CEO really gets to the central issues faced by RIM,” he told Reuters. Northern Securities analyst Sameet Kanade called the move “a nice first step,” but echoed Urlocker’s statement that it’s by no means not a cure-all for what’s been ailing RIM.
It seems Balsillie, more so than Lazaridis, has been the public whipping boy. It could simply be that his face is generally more well-known to the average citizen, especially after his very public aggressive attempts at purchasing an NHL franchise. But as Ryder points out, there are two ways to look at it when determining what’s gone wrong and who’s to blame.
“This is a chicken and egg thing because marketing would want to promote new products and they haven’t had any significant new products for the last 18 months,” Ryder tells CBJ. “They’ve had what we’d call evolutionary change as opposed to revolutionary change and this is a market that expects revolutions every 12 to 16 months. But it won’t be until this fall that RIM is going to launch their so-called Superphones.” What exactly these Superphones will be able to do in terms of additional end-user functionality in comparison to the devices already on the market remains somewhat of a mystery. What is known is that they will be using the specialized QNX software, which is a high-powered UNIX-like real-time operating system. RIM purchased the software from QNX in the spring of 2010. QNX software is also known for being the technical backbone of nuclear power plants.
The concern is that RIM has put such high expectations on what these new super communications devices can allegedly do, they effectively need to knock the socks off consumers, or we’ll see the markets react with even greater negativity than in the past, and that in turn is when takeover talks will become even more intense. As it is, the Superphones were to have originally been out in the first half of this year, but that timeline has been delayed until the second half.
“Any company that sells $5 billion worth of products every three months is not instantly doomed, but they’ve got to get something out to the market that really impresses people and they haven’t had something like that now for almost two years,” Ryder continues.
With RIM’s stock price hovering between $14 and $20 for the past several months, it has been holding relatively stable, but any decrease below the $10 range and it will enter into critical hostile takeover territory.
“If the stock price got down into the single-dollars range, like $8 or $9, then there would be the possibility of a takeover,” Ryder opines. “It would still cost somebody billions of dollars to take over the company, but compared to when the stock price was $100 per share, it’s a bit like having a 90 per cent off sale.”
It stands to reason that with these recent changes made at the very top, investors will give the new leadership some time to try and recapture much of the market share which has been lost over the past year. But murmurs continue about possible suitors, and a number of candidates come to mind, with some likely being far more interested than others. It is highly doubtful Google or Apple would make a serious bid, with their only real interest being an acquisition of the patents.
“It would be somebody who wants to get into the market, possibly Microsoft because their operating systems and phones have not done overly well,” Ryder states. However, that would mean basically throwing out the new BBX operating system. Other potential suitors with a direct business correlation would seem to be Oracle, Amazon.com and Samsung, despite the latter’s stern denial of interest.
Rumours had also been circulating mere weeks ago that RIM had reached out to Goldman Sachs, with contact allegedly based upon an idea of possibly breaking the company into three separate entities.
“You could have one company that runs the networks and provides service, you could have a device network that would sell whatever the new Pearls, BlackBerrys and PlayBooks that might be, and then in theory you could have a third company that manages the intellectual property,” Ryder suggests. “We’ve seen with Nortel last year the hidden value in their patents can be huge and you might give people a chance to own stock in any of the three companies. It would allow the board more free-hand to explore those possibilities. Anything that would give shareholders back some of the value they’ve lost would make them happy.”
Accommodating iPhones and Android users to come onto the RIM network and allow messages over their service is an enticing prospect for many consumers who would be able to continue using their fun devices over a secure network. On the plus side, the company’s network outages are extremely rare and there is a secure setup in place to transmit messages.
While some members of the public love RIM and others do not, from a purely economic standpoint there’s no doubt it’s in the best interest for us as a nation to see it succeed.
“Every Canadian has a vested interest in the success of RIM,” Ryder reveals. “Every major pension fund in Canada owns some of their stock, whether it’s the Canada Pension Fund, OMERS or the Teachers’ Pension Fund, most of them own millions of shares as part of their portfolio. Even the Norwegian government pension fund is invested in RIM so there are a lot of people who have ridden this technology wave. This product launch in the fall of 2012 is going to be watched so closely and so critically, because in essence they’re (Balsillie and Lazaridis) betting the company on it,” Ryder states.
Even although rumours can often cause a certain degree of consternation, depending on what’s being said, Ryder believes that in this case it will go a long ways in determining whether anything is happening or not.
“If we go back into a mode where we hear nothing out of Waterloo for three or four months, I think that’s the worst news,” he reveals. “If we continue to hear little rumours and leaks, it means people are working and they are trying to find some ways to make a deal and that’s all positive, not negative.”
To procure a substantial turnaround in the share price, RIM needs to dazzle the public with new products, which hasn’t happened in about 18 months. To a large extent it’s a matter of Balsillie and Lazaridis being able to revamp their slumping credibility with a growing number of shareholders, and now they’ve ironically decided it’s best to step aside in order to allow others to try and achieve that goal for them. In the past, they have been extremely successful and it garnered a lot of trust when they followed through in the clutch; but the last couple of product launches have been both late and underwhelming.
RIM cannot afford a third such result—no matter who’s in charge.