It may seem like an odd recipe for a marriage, the world’s largest consumer mobile handset vendor and a fallen Canadian icon that’s long been - and could once again be - the darling of the suit-and-tie-wearing set. But investor response to a report yesterday that Korean conglomerate Samsung was in talks to acquire BlackBerry in a deal that could be valued up to US$7.5 billion reaffirms market confidence that the Waterloo-based company still retains significant value. And still holds the potential to attract the interest of global-scale players.
A known quantity
We’ve been down this road before, of course. In August and September 2013, when BlackBerry was quite possibly at its lowest point and it was actively looking for a buyer, Samsung was a leading contender. And ever since then, speculation about the two companies possibly coming together in some form has never fully extinguished.
This largely explains why investor reaction - first up by 30% when the report first broke, then down by 16% in after-hours trading when BlackBerry issued its a statement denying it was in talks - was so swift and so extreme in both directions.
It surprised precisely no one that BlackBerry and Samsung denied that they’re in talks. No company will ever admit anything until a deal is signed, sealed and delivered. The Byzantine rules of how publicly traded companies operate compel all players on all sides of a potential deal to say absolutely nothing. So while the statements from both companies represent little more than standard corporate-speak that ultimately won’t completely quell the speculation, a closer look at Samsung’s and BlackBerry’s relative trajectories reveals why the environment isn’t conducive to a merger or acquisition anytime soon, if at all.
Samsung getting desperate?
In many respects, Samsung needs a deal more than BlackBerry. The wounded giant of the mobile market has spent the better part of the last year wrestling with falling sales, market share and margin. In the most recent quarter, Gartner reports Samsung’s global smartphone sales fell to 73.2 million from 80.3 million in the year-ago quarter, and its market share slid from 32.1 per cent to 24.4 per cent. Perhaps even more troubling, sales were off 28.6 per cent in China, Samsung’s largest market. The situation shows no signs of easing in 2015 amid a growing wave of aggressive and design-forward competition from LG, Lenovo - which snapped up ailing Motorola Mobility from Google last year - and Chinese upstart Xiaomi.
With its consumer fortunes slipping, Samsung is looking for safe harbour, and BlackBerry’s strength in the enterprise space offers all that and more. Blackberry would give Samsung credibility in a market where reputation is everything and long-lead buying cycles and margin-heavy contracts and subscriptions are a marked contrast to the brutally commoditized economics of the consumer space.
BlackBerry has been rapidly expanding its portfolio of back-end and device management solutions at a time when high-profile hackings and breaches are prompting businesses to look for trustworthy solutions. This positions the company well as it pivots away from its once-dominant handset business, and reinforces the belief that there’s no burning need for it to sell out anytime soon.
That the two companies have operational history has only added fuel to the speculative fire. Last November they announced a partnership to bring BlackBerry security to the Android platform - another signal that Samsung’s security efforts to-date, largely wrapped around its Knox 2.0 offering, weren’t gaining sufficient traction. Although any potential merger or acquisition would likely have to wrestle with significant cultural and business process compatibility and integration issues - as well as a range of regulatory hurdles, including Industry Canada approval - knowing who you’re dealing with in advance certainly can’t hurt.
Beyond their shared history, the companies complement each other relatively well. There aren’t a whole lot of areas where the two companies directly compete or otherwise clash. In that light, Samsung is like a deep pocketed big brother who can provide global scale and resources to BlackBerry, while BlackBerry gives Samsung much-needed credibility in the enterprise space. BlackBerry’s trove of 44,000 patents - worth upwards of $2 billion - is another appealing jewel for Samsung.
In addition to the patents, the BlackBerry brand itself still retains significant value among its core market. Even in the unlikely event that BlackBerry ultimately accepts an offer - from Samsung or anyone else - any buyer would do well to leave the brand intact as it looks for other ways to combine resources and find new value.
No need to sell out
Despite the roller coaster ride of the last couple of years and the almost total global consumer market share collapse that prompted BlackBerry’s shift back to the enterprise, the company is emerging from its radical transformation well positioned to capitalize on the business market’s growing demand for secure, single-source solutions for growing fleets of diverse mobile devices and services. Investors who backtracked on the stock after-hours following Wednesday’s initial spike reflect the market’s rational realization that BlackBerry today is far removed from the dark days of 2013 when it desperately sought a buyer.
Samsung’s go-forward options are far more limited than BlackBerry’s. If it doesn’t outright purchase the Waterloo company, expect it to pursue additional partnerships and joint ventures as it tries to steady itself in an increasingly turbulent consumer market. Purchase offers for other enterprise-focused tech companies further afield are also likely.
While the long-term future of BlackBerry remains something of a work in progress, the investors who’ve stuck with it up until now believe the future growth potential of an enterprise-centric BlackBerry far exceeds anything Samsung or any other potential suitor is currently willing to pay. Which means BlackBerry CEO John Chen’s runway shows no signs of running out anytime soon, and there’s no need to rush into any sort of deal. For now, at least, BlackBerry is doing just fine on its own, and there’s nothing to suggest that will change anytime soon.