Why Hewlett-Packard Needs BlackBerry

So far this year Hewlett-Packard (NYSE: HPQ  ) – hereafter, "HP" – has been the hottest stock among the Dow 30, its August 13 close of $27.30 representing a 92% increase from its end-of-year close of $14.25. However, on August 22, the company closed at $22.22, posting a one-day drop of just over 12%. The drop was likely the culmination of increasing shareholder unease over:

The unease has led to what seem to be perennial calls for HP to divest itself of some of its operations and/or have the CEO replaced, issues I have discussed elsewhere. An HP weaknesses that isn’t discussed as much as it should be is its lack of smartphone offerings.

Answer the (need for a) phone
Should a smartphone offering be a major concern for HP? Absolutely, as even Whitman herself has acknowledged. Smartphones are well-established as a legitimate PC device, a major computer manufacturer ignores this fact at its own risk. 

Moreover, principal competitor Lenovo has established itself in the smartphone market; it is building on its primary base in China, and is increasing its exposure in India, Indonesia, and the Philippines. These moves are viewed as precursors to expanding its market in the U.S. It would seem that the longer HP waits, the harder it will be to establish competitive footing.

When HP purchased Palm in 2010, expectations were that this would lead to the introduction of an HP smartphone, which it did – in the form of the Veer, which was released in 2011 and killed by HP when it announced that it would no longer support the webOS Veer utilized, the announcement coming a few months after the phone was introduced. (The same fate awaited 2011's TouchPad – a webOS-based tablet. HP has since addressed its lack of tablet PCs with the introduction of the Slate 7 and the ElitePad earlier this year.)

Well into the second year of Ms. Whitman's "five-year-turnaround" effort, HP's CEO continues to reaffirm her commitment to keeping the company intact, believing that its size is a major advantage. That being said, and given her recognition that HP needs to offer a smartphone, it would seem reasonable to wonder how she plans to address that need. 

BlackBerry to the rescue?
On Aug. 12, beleaguered BlackBerry  (NASDAQ: BBRY  ) announced that its board of directors was exploring "strategic alternatives," including the possibility of selling the company. In an August 15 interview, Lenovo Chairman and CEO Yang Yuanqing expressed interest in expanding production capacity, but declined to comment on the possibility of acquiring BlackBerry. On August 27, BlackBerry announced that it is considering spinning off its popular message service, BlackBerry Messenger, into a subsidiary company to be called BBM.

Financially, BlackBerry would seem to be a fairly trouble-free acquisition. It has no debt and only $3.7 billion in total liabilities against total assets of $13.2 billion. Its book value (as of May) is approximately $5.9 billion, making it look to be a slight bargain, given a market cap of less than $5.4 billion; its enterprise value is roughly $2.5 billion.

Why buy BlackBerry when HP has the capacity to develop a smartphone on its own? I can think of several reasons:

  • Lukewarm reviews received by its tablets may indicate HP will need time for development and ramp-up of production for a smartphone, or it risks entering the market with an inferior product
  • BlackBerry presents production facilities already geared to smartphones, and its new flagship model (Z10) has – so far – been well-received
  • BlackBerry is established in South America, Africa, and Indonesia, presenting HP with a ready-made global presence for a smartphone
  • Non-phone-production-related BlackBerry operations (such as BBM) could either be assimilated or sold-off, thereby minimizing the net cost of the acquisition (IBM, for instance, is reported to have been interested in BlackBerry's enterprise-services operations)
  • HP and BlackBerry have a history of cooperation and collaboration.

Stumbling points
HP has had its share of unfortunate acquisitions – more than 60, in fact, between 1999 and 2010 – including Autonomy, costing HP $11 billion, $8.8 billion of which ultimately had to be written off (HP has not been shy about overpaying for its acquisitions). Ms. Whitman is aware of the company's spendthrift ways, and while she intends to use acquisitions to benefit HP, she also intends to keep the price for any acquisitions reasonable.

Another point to consider is competition. There are two companies that would be interested in acquiring smartphone production capacity: Lenovo and Microsoft (NASDAQ: MSFT  ) . Microsoft had been interested in purchasing Nokia, the talks breaking off-but, surprisingly, it was announced on September 3 that Microsoft had completed a $7.2 billion acquisition of Nokia's handset operations and patents. BlackBerry, at approximately one-third the value of Nokia, could be a more attractive target for a company like Lenovo, which has a market cap of less than one-fifth the size of Microsoft's.

Microsoft does present another issue for a BlackBerry acquisition by HP, however: HP has a long history with Microsoft and its operating system. Recently HP entered into a collaboration with Microsoft to promote the transition of its business customers from the popular Windows XP platform (support for which is scheduled to end on April 8, 2014) to a more up-to-date version of Windows. Moreover, HP's business-oriented ElitePad tablet utilizes Windows 8.

Could its commitment to Windows preclude HP from offering a smartphone that had its own operating system (BlackBerry 10 OS)? I think not, as HP already offers Android with its Slate tablets, and is currently supporting the transition of Palm's webOS to an open-source project

Summary
Producing a smartphone is going to cost HP whether it develops its own or acquires a producer; the former will consume more time, the latter will cost more. In terms of entering the market on solid footing and being ready to compete, I believe acquisition is the better alternative, and BlackBerry's availability seems like serendipity. 

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Read/Post Comments (4) | Recommend This Article (2)

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  • Report this Comment On September 03, 2013, at 11:50 PM, tidesup wrote:

    As I read your article I see desperation in it also. Why would a failing Company like HP acquire another failing Company BBBY? I think Ms Whitman has done an outstanding job to keep them from bankruptcy. She will continue to hold up the company but HP has no catalyst, no driving factor to tickle the interest of investors. The acquisitions you suggest are not possible as they burn up cash. I see this stock falling under 20 possibly to 15 even though Ms Whitman is great indeed.

  • Report this Comment On September 04, 2013, at 12:59 PM, josephpporter wrote:

    tidesup -

    I agree that Whitman is doing an excellent job. If her report on their latest quarter is accurate, while their revenues are down, their profits are up due to more efficient operation. Their stock was up by 90% YTD before the "summer doldrums" beat everyone down (HP is now up 56% or more, YTD).

    I will admit that HP's hardware expertise has diminished because of their focus on software and enterprise operations, which is why, if they are going to develop a smartphone, they will need to purchase a company that already produces them.

    Thanks for your comments!

    jpp

  • Report this Comment On September 04, 2013, at 7:06 PM, tidesup wrote:

    Joseph,

    Again, I have to play the devil's advocate. The smartphone space is so highly competitive that I don't think that HP can compete coming in so late in the game. But I will give you this she is trying to save this company. I just don't think that is the direction they (HP) should go (smart phone). But in the mean time I believe the stock gets beaten down. She will get this stock back on it's legs, But not in the near term.

    Regards,

    David Billingsley

  • Report this Comment On September 05, 2013, at 10:33 AM, josephpporter wrote:

    David -

    There are a lot of people (even in HP) who would agree with much of what you say. As for the future of the stock price, only time will tell.

    Thanks for writing, and devil's advocates are always welcome.

    jpp

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