If you look at the fundamentals alone, there is no scenario in the world where you should consider an investment in BlackBerry (NASDAQ:BBRY). Yet, with acquisition rumors getting louder, and Blackberry's stock trading below Fairfax Financial's initial bid, is there in fact value in shares of this struggling company?
Does an acquisition make sense?
Back in August, the typical analyst projected that BlackBerry could be acquired for $10-$15 a share. Today, such prices would represent a nice premium, but the market seems a bit pessimistic that such a premium will materialize.
When you dig beneath the surface, and look beyond BlackBerry's 45% decline in quarterly sales, there might be some value to its assets. Of course, BlackBerry has a handset division, but it also has BlackBerry Messenger, a messaging service that allows for the integration of consumers, businesses, and advertisers to target one another.
Some believe that BlackBerry Messenger could generate over $1 billion in annual revenue initially. Then, BlackBerry has a massive IP portfolio that is valued at $2-$3 billion , a hardware business worth $2 billion, and an Enterprise System. Therefore, we can identify some value in BlackBerry, and with a $4 billion market capitalization, an acquisition might make sense.
Already, Fairfax Financial has made a $9 per share offer on BlackBerry and private equity firm Cerberus is also believed to have expressed interest. However, Reuters reported that SAP, Cisco (NASDAQ:CSCO), and no other than Google (NASDAQ:GOOGL) is also in talks to acquire BlackBerry or at least part of the company.
If accurate, breaking the company apart might make a private equity takeover more likely and much easier in terms of financing. So, in the attempt to determine if in fact such an acquisition will occur, what would these major tech companies want with BlackBerry?
First is Google, which might be the biggest head scratcher given Google's large acquisition of Motorola Mobility. However, some believe that Google is looking for a way to better target and advertise on mobile systems with videos. One of the benefits to BlackBerry Messenger is considered its video technology, which would allow Google to be more creative with video advertising.
Moreover, it's no secret that Google needed patents when it acquired Motorola. Therefore, perhaps BlackBerry's patents are attractive to some degree, especially those in user interfaces, battery efficiency, and data compression, which are all areas of focus for Google.
As for Cisco, BlackBerry's patents and security technology might be appealing. Cisco is a leader in security technology, but so is BlackBerry. Back in August, Cisco CEO John Chambers identified security as one of the greatest growth engines for Cisco. Therefore, the synergies of both technologies (BlackBerry and Cisco) could make Cisco the dominant force in security technology, an industry that is growing rapid. In addition, Cisco's enterprise business grew 9% during its last quarter, a current growth driver, meaning this industry might also be attractive.
Now, the obvious problem for BlackBerry is that there is no clear bidder for the company. The reason is because several companies might want parts, but only Fairfax has shown documented interest in acquiring the entire company. Sure, this might be a problem, but once you get Google or Cisco in the mix, with billions of dollars in cash, a P-E firm might then be able to purchase what they want. Essentially, BlackBerry has become a yard sale, and surprisingly, there are a few shoppers.
With all things considered, is BlackBerry a good buy at $8? Well, it's risky, but the risk/reward ratio is favorable.
We already know the company is being shopped, and that Fairfax entered a letter of intent to acquire BlackBerry. The problem is financing, but if one of these other names take just one of the distressed assets, Fairfax could afford the acquisition.
In terms of risk, BlackBerry is not a good investment alone. The company just announced that it will take $400 million in charges as part of a restructuring program that includes cutting 40% of its workforce. The company is no longer providing earnings guidance and seems preoccupied with finding a buyer.
Therefore, at $8 the risk is worth the reward, but investors should be very cautious about the size of their position. Because if by some chance the acquisition falls through, BlackBerry could fall significantly further.
Brian Nichols has no position in any stocks mentioned. The Motley Fool recommends Cisco Systems and Google. The Motley Fool owns shares of Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.