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Yahoo’s Next Best Move? Buy/Merge With RIM

EBN blogger Anna Young says {complink 6518|Yahoo Inc.} needs a new bolder and riskier growth plan. Here's one: It should buy troubled BlackBerry maker {complink 4644|Research In Motion Ltd. (RIM)}. Both companies need each other direly, and their options dwindle as they dawdle, even as competitors chew up their respective market shares in search engine and mobile devices. (See: Yahoo, Yang-less, Needs Riskier, Bolder Plan.)

The two companies are plagued by a similar malaise — the inability to transform beyond original services and products. RIM was once King of the Hill in smartphones and mobile enterprise messaging. Its BlackBerry smartphones were the darling of business people, but the waists that once were adorned with RIM phones are now sporting {complink 379|Apple Inc.} and {complink 2294|Google} Android devices.

Anecdotal evidence is piling up that RIM's share of the enterprise messaging market will keep declining, unless it comes up with a new plan. Recently, I misplaced my company-issued BlackBerry device and was offered an iPhone 3 as a possible replacement. I stuck with the BlackBerry, but until then, I didn't even know my company supported the iPhone for enterprise messaging. It does, now. And, it's not alone. More companies, pressured by employees tired of the BlackBerry's limited options, are supporting and offering competitive products. Personally, I am discovering newer and newer uses for my {complink 4751|Samsung Electronics Co. Ltd.} Galaxy S2, which I am quite satisfied with. Apparently, I am not alone. Even Apple co-founder Steve Wozniak believes Android devices trump Apple iOS in some areas.

Yahoo's position isn't any better, and it is in fact getting worse. The company is losing market share fast to Google and {complink 10867|Facebook}. Its advertising revenue base is being eroded by social media companies like Facebook, and the decline is likely to keep accelerating. The company's sales have been sliding with year-over-year quarterly revenue dropping in the three months ended September 30, 2011 to $1.2 billion from $1.6 billion, in the year-ago quarter. Sales for 2011 are estimated to be in the range of $4.4 billion, down sharply from $4.6 billion in 2010. Forecasters expect Yahoo's 2012 revenue to rise only slightly from the prior year to $4.56 billion.

Neither company is a great acquisition target. Yahoo has no offers on the table, and it appears Microsoft is only interested in buying bits and pieces of the company. This is not in Yahoo's interest. If Yahoo sells its 40 percent stake in China's Alibaba and 35 percent interest in Yahoo Japan, its market value is likely to decline even further, and so will its ability to compete globally. No other potential offers are likely for Yahoo, which, with a market capitalization of nearly $20 billion, is too large to be gobbled up by anything but the biggest tech companies in the market. None of them appear interested.

RIM is not fielding any plausible acquisition offers, either. The company's stock price soared earlier this week on speculations Samsung Electronics might be interested in making an offer, a rumor that the Korean company torpedoed on Wednesday. RIM's shares are already giving up the gains; on Wednesday, they dove more than 3 percent after the Samsung report.

Analysts are not particularly gung ho about a deal for RIM. Shaw Wu of Sterne Agee was concerned that RIM's current market value (about $9 billion) poses a challenge to potential bidders, since the upside might be “limited.” In a report emailed to me on Wednesday, Shaw poured cold water on the likelihood of Samsung or Microsoft making a bid for RIM. He said:

We see $5-$7 billion potential value, meaning $9-$13 per share. We believe its most valuable assets are arguably its patent portfolio and BlackBerry Messenger (BBM) app. We estimate its patent portfolio could be worth $2-$3 billion assuming the prices that an AAPL led team paid (which RIMM was part of) for Nortel assets and GOOG for MMI. For BBM with its 45 million users, we estimate it could be worth $2-$3 billion.

Last but not least, we believe the value of its push network and BlackBerry OS are more questionable given competitive issues both have had in the marketplace but nonetheless, we assign a value of $1 billion (the price paid for PALM). This gives us a valuation of $5-$7 billion, meaning a stock price of $9-$13, which is a bit below where it is currently trading.

Other considerations. The other considerations to keep in mind are: (1) Samsung is doing very well with Android — in fact, they are taking share against fellow Android licensees HTC and Motorola; (2) MSFT has effectively made its bet on its Windows Phone 7 operating system — it makes little sense to bet on another OS that is having difficulty; and (3) the Canadian government may not allow an acquisition by a foreign company due to national security interests.

Ouch. The game is not lost, though. RIM is still a profitable company with no long-term debts. So is Yahoo. RIM has a healthy balance sheet (about $1.5 billion in cash, short- and long-term investments) and so does Yahoo (no debts and $7 billion in cash, short and long-term investments). RIM's annual sales of $19.9 billion (fiscal 2011) dwarfs Yahoo's ($6.3 billion in calendar 2011), but the search engine provider has a much bigger market capitalization ($20 billion versus RIM's $9 billion), which means investors aren't that impressed with RIM's higher sales.

So, this is what I suggest. A merger of the two companies — some market watchers don't believe in a merger of equals, and I tend to agree. Yahoo will therefore dominate such a venture. What are the advantages of such a hook up to both companies? First, a much needed new lease on life; second, the opportunity to enter new markets and solidify positions in existing operations; third, a chance to leverage about $8.5 billion in combined cash and significant borrowing strength to push for a bigger role in adjacent markets; and, lastly, the chance to fight for a future in the mutually supportive Internet and wireless markets.

But will RIM and Yahoo take such a step? I doubt it. They've both been too timid for far too long, and RIM's current co-CEO and co-chairman structure is in itself obstructionist. What's clear is that the status quo isn't in either company's interest.

40 comments on “Yahoo’s Next Best Move? Buy/Merge With RIM

  1. Wale Bakare
    January 18, 2012

    Thanks Bolaji for the article. I hardly seen new innovation from Yahoo that may be of good benefit to RIM's Blackberry. Though, Bolaji you have highlighted areas i think of interest to shareholders. But, what could sustain and keep them in business for longer period should merger happens –  technology innovation that may complement Blackberry and BBM in particular.

  2. DataCrunch
    January 18, 2012

    Two wrongs don't make a right.

  3. Wale Bakare
    January 18, 2012

    Dave,

    I totally agree with you. Should Skype not have acquired by Microsoft, it would've be the best joker for RIM.

  4. DataCrunch
    January 18, 2012

    @Wale, Yahoo should have jumped at the Microsoft acquisition when it had the chance.

  5. bolaji ojo
    January 18, 2012

    Dave, Right. Yahoo should have jumped at Microsoft's offer four years ago. It didn't and Microsoft isn't likely to make the offer again. So, aside from fading off what should Yahoo do? It can continue managing a decline or do something radically different. Google did the same by buying Motorola and introducing Android. Yahoo must come up with a new game plan.

  6. Houngbo_Hospice
    January 18, 2012

    “Two wrongs don't make a right.”

    That is a very bold prediction by Bolaji. I personally don't believe RIM would be willing to accept an alliance with Yahoo. Both companies have to find their salvation in different direction.

  7. Houngbo_Hospice
    January 18, 2012

    “Yahoo should have jumped at the Microsoft acquisition when it had the chance.”

    Dave,

    That was three years ago. Many predicted Yahoo desintegration when the deal failed, but the company is still here today. They are struggling but not dead yet.

  8. Anna Young
    January 19, 2012

    The two companies are plagued by a similar malaise — the inability to transform beyond original services and products”.

    @Dave, I agree. If the two companies are unable to transform beyond original services and product, why would one seek to unite them? That would be a doomed union. Would it not?

  9. Anna Young
    January 19, 2012

    @Hospice_Houngbo, what would your predictions be? Should yahoo continue in it's present state? For how long can this carry on?

  10. SunitaT
    January 19, 2012

    @Bolaji, do you think RIM should adopt Android or Windows Phone to stay alive rather than get merged some other company?

  11. SunitaT
    January 19, 2012

    Should yahoo continue in it's present state?

    @Anna, I think yahoo has already made several changes. It has hired Scott Thompson as its new CEO. I am sure Scott's deep understanding of online businesses will help Yahoo. Moreover by asking Jerry Yang to resign from Yahoo board of directors Yahoo has demonstrated its desire to grow.

  12. Anna Young
    January 19, 2012

    @Tirlapur, good point – wait and see game. However, I don't think hiring Scott Thompson will drastically change things for Yahoo. Do you?

  13. Daniel
    January 19, 2012

    If we are looking both the companies, they are king once in their respective field and now they are lagging very much behind the competitors. Both the companies need some sort of stimulations and extra pull for the upward journey.

  14. Daniel
    January 19, 2012

    Tirlapur, hiring and firing are very common in Yahoo. I think they used to fire the CEO's once in a year or 18 months. So far all the CEO's are expertise dignitaries and having a good tracking record, but nothing has happened. Like you most of us have similar thoughts.

  15. bolaji ojo
    January 19, 2012

    Tirlapur, RIM won't adopt Windows OS or Android OS. I don't see the benefits for the company. It's Blackberry system is quite good but just not used by other companies. It's proprietary. If it adopts any of these two operating systems it loses the advantage it currently has and this won't distinguish it in the market.

  16. bolaji ojo
    January 19, 2012

    Transitions are difficult and it's obvious both RIM and Yahoo are having problems transforming their operations. Theoretically, a company can exist forever but in order to do this, it must be flexible, adaptable and continuously evolving. These two companies are so far not doing a good job of competitive evolution.

  17. prabhakar_deosthali
    January 19, 2012

    Yahoo and RIM are the companies working in different domains. The only common things between the both seems to be that they are now lagging behind the competition in offering new products/services making their existing customers to look elsewhere.

     

    I do not think that their merger will help either of them. Each one of them has to get merged with a stronger player in their domain.

  18. Eldredge
    January 19, 2012

    @prabhakar – I tend to agree. I'm not sure that joining together two struggling companies is a recipe for success. Just the effort required to merge is a distraction from productivity…I think one of the partners in a merger needs to be in a good position.

  19. Houngbo_Hospice
    January 19, 2012

    “Should yahoo continue in it's present state?”

    @Anna: No of course. I was just trying to make people understand that the answer to the question “what should Yahoo do next”? is not that easy to find out. I'm not saying that no action should be taking to address the company's current troubles but I don't think that a merger/alliance with RIM will likely happen.

  20. Barbara Jorgensen
    January 19, 2012

    Strange bedfellows, indeed. But stranger things have happened. Google and Motorola Mobility comes to mind. But I agree that the biggest obstacle to any merger with RIM is the co-CEO structure and the apprent stubborness of aforementioned CEOs. If its earnings take any more hits, RIM won't be doing its shareholders any favors by not shopping around.

  21. mfbertozzi
    January 19, 2012

    It is a good point, Barbara. At the end, what is real obstacle for allowing RIM right recovery? Their internal organization or current financial restriction? I was thinking another break to consider is about the uncertainty on business model that could impact Yahoo too. Where will be major revenue for communications in the near future? If mostly in the OTT services, maybe RIM has to drive the boat there.

  22. SunitaT
    January 20, 2012

    @Anna, I am pretty optimistic that, Scott Thompson will help Yahoo rebuild its lost glory. People are raising questions about google search results relevance. Recently twitter also raised concerns  over google search results. This gives yahoo a good chance to attract such dissatisfied google users.

  23. SunitaT
    January 20, 2012

    If it adopts any of these two operating systems it loses the advantage it currently has and this won't distinguish it in the market.

    @Bolaji, I agree with you that RIM will loose its advantage, but clearly the trend is people either want Apple OS or Android and RIM is loosing its market share. RIM should take some drastic steps to come out of this situation.

  24. SunitaT
    January 20, 2012

    Google and Motorola Mobility comes to mind.

    @Barbara, we can't compare google-motorola deal with yahoo-RIM because google always wanted to enter the smartphone business because it owned Android. Yahoo had no plans to enter mobility business and infact it never tried to build any OS for mobile. Moreover google was in a very powerful position to buy the motorola business. In these case both yahoo and RIM are struggling.

  25. Jay_Bond
    January 20, 2012

    I think a merger of Yahoo and RIM is good idea. In fact it might be the only true solution to help salvage both companies. Both Yahoo and RIM are losing marketshare daily and if they don't make a drastic change soon, it will be too late for either of them.

  26. _hm
    January 20, 2012

    Both are weak organizations and little disoriented. This may not be good for organization or share holder. 

  27. Cryptoman
    January 23, 2012

    According to recent news, RIM's co_CEOs and co_chairmen Mike Lazaridis and Jim Balsillie have resigned as a result of the pressure from investors. Both Lazaridis and Balsillie will remain as the board members and will hold on to their 5+% a head stake at the company. These two are the two of the three largest shareholders at the company. Lazaridis will have a more active role as the head of the new innovation committee from now on.

    All this change sounds like the transformation has started in RIM and good days may finally be ahead for the company. Change of leadership and bringing a new vision to a company can be a very positive move. However, only time will tell if that is the case for RIM. Maybe Yahoo sees the great opportunity already.

  28. prabhakar_deosthali
    January 23, 2012

    The resignation of the current CEO's is a good begiining but what is more important is who is the new leader and what is his/her vision about pulling RIM out of trouble. Otherwise RIM will become another HP story

  29. Wale Bakare
    January 23, 2012

    Yes, the new CEO has inherited huge pressure and surely onus rest on him to redefine RIM's management vision and goals. According to one Analyst at Morgan Stanley, tagged the new CEO – Mr. Thorsten Heins as of more product executioner rather than visionary leader. I can only wish him all the best and successful turn- around at RIM.

  30. Houngbo_Hospice
    January 23, 2012

    We can expect hope he could bring back the company on the winning track. But RIM will probably need more an innovative leader than just someone who is put there just to please investors and shareholders.

  31. Houngbo_Hospice
    January 23, 2012

    “However, only time will tell if that is the case for RIM. Maybe Yahoo sees the great opportunity already.”

    RIM new CEO hasn't started his job with good news. as RIM shares fall after CEO shakeup. He will have more to do to convince the market.

  32. _hm
    January 23, 2012

    This may required condition from some suitable buyer. Soon, we will see new owner for RIM. Our best wishes to RIM and BB.

     

  33. bolaji ojo
    January 23, 2012

    Cryptoman, This is something the two co-CEOs should have done sometime back but it's also too little. They retired but will stay on the board and their choice for CEO is somebody who is closely associated with them. The first comment from Thorsten Heins, the new CEO, was that nothing would change at the company. The market heard him and the stock price fell nearly 9 percent. That doesn't sound like a good beginning. The former CEOs need to go, away. Then the company should appoint a visionary who is not connected with them and commence the radical steps needed to restore investor confidence.

  34. bolaji ojo
    January 23, 2012

    The new head of RIM is promising more of the same. Thorsten Heins said shareholders should not expect “drastic changes” yet that is what the company needs. He is not going to last in the job.

  35. Cryptoman
    January 24, 2012

    As Bolaji said, 9% drop in shares does not look good at all. I find Heins' statement of “nothing will change at the company” very contradictive to what the company truly needs. For someone with 20 years of experience as a chief executive of several divisions in the German giant Siemens, this statement is either a big career mistake or a very strategic move that nobody in the market quite comprehends at the moment.

    RIM is going to be releasing its new generation phones in the second half of 2012 when the competition will be fierce. RIM will have to come up with something at least as good as iPhone 5, the new Windows and Android devices before then to stand a chance. I would not want to be in Heins' expensive shoes at the moment.

    Given all these developments and facts, I still wonder what Yahoo has in mind though…

  36. bolaji ojo
    January 24, 2012

    Cryptoman, The question “what does Yahoo have in mind?” is very key to the company's future. Nobody knows but the new CEO will seek an answer urgently, a situation that has become even more urgent with the company's recent performance. Scott Thompson, the CEO who got the job only two weeks ago says the company needs to “do better”. How is the question most want answered.

  37. Ashu001
    January 31, 2012

    Bolaji,

    As I was thinking about this merger postulated here,My thoughts turned to another possible Merger-Windows buys Nokia.

    Does that one make more sense?

    Problem with the current Merger situation is neither parties here have a very coherent strategy for the smartphone space.

    What you pinpointed here made a whole lot of sense.


    But will RIM and Yahoo take such a step? I doubt it. They've both been too timid for far too long, and RIM's current co-CEO and co-chairman structure is in itself obstructionist. What's clear is that the status quo isn't in either company's interest.

    For sure this merger will enable them both to compete better as well as enter new markets;but unless someone is willing to take control and accept there are problems(& consequently take plenty of risks),we are not going to see much in the name of change.

    So thats the whole issue at hand. Is'nt it?

    Where is the risk-taking and innovation Going to come from?

    Ashish.

     

  38. Ashu001
    January 31, 2012

    Wale,

    You are quite right.

    The Board at RIM still don't realise the scale of the challenge the company is facing in the smartphone space.This head in the sand approach is not going to change with an insider becoming CEO,we need an outsider to shake things up.

    Shake things up fast.

    Ashish.

  39. bolaji ojo
    January 31, 2012

    Ashish, Does it make sense for Microsoft to buy Nokia? One can make a case for Microsoft hanging its mobile operating system strategy on Nokia as long as it accepts this would irritate other Windows OS licensees. I don't see a major drawback here for Nokia except perhaps hurting its Scandinavian pride.

    Microsoft aspires, though, to much more than this. The silent war between Apple and Microsoft hasn't ended. It continues at another level with Apple having gained the upper hand in mobile phones and in PCs. (The company is now the number one vendor of PCs if you throw in tablets, according to iSuppli.)

    The RIM and Yahoo story is a different one. They both need a new business model but I believe Yahoo can overhaul its business and thrive alone whereas RIM is in a difficult situation. What bothers me is that I remember writing about Nokia along the same vein years ago. It's easy for a company, person or entity to keep coasting on old glory, believing they are doing fine whereas the enemy has already dug a pit around them and only one more strike would be required to bring the structure down.

    That's where RIM is now. It is selling in other parts of the world but see who's making the money? Without solid profits you can't win in the consumer electronics market. The pace of innovation is too rapid and the lead time between design and market shortening faster each half year.

  40. bolaji ojo
    January 31, 2012

    Cryptoman, Yahoo is going back to the drawing board. That's what happens when a new CEO is appointed. The previous leaders wasted too much time and the new one needs time to study the business, understand its weaknesses and strength, come up with a plan and start executing.

    This will take a minimum of six months during which he will review the management, line up the ones he wants and fire those he doesn't want or need. Yahoo's plan won't be apparent for many more months. It will be interesting and might work though the competition would have moved the goal posts again by then.

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