It’s no secret that the once-great telecom company, BlackBerry (BBRY), has endured a brutal few years.
But unknown – and unreported – by many, the beleaguered firm has one saving grace…
Its lucrative patent portfolio.
That’s what I told Kelly Evans and Bill Griffeth on CNBC’s Closing Bell last September. And its salvation almost came to fruition.
On January 14, BlackBerry shares soared by nearly 30% on rumors that it would be bought out for its patent portfolio.
Hours later, though, the reports were vehemently denied, sending shares crashing back to Earth.
However, I’m convinced that shares could ultimately soar again. And here’s the smartest (read: safest) way to play it…
Deny, Deny, Deny
When news emerged from Reuters that Samsung Electronics (SSNLF) had approached BlackBerry with a takeover offer in the range of $13.35 to $15.49 per share, it valued BlackBerry at roughly $7.1 billion, 24 times its EBITDA, or 1.9 times revenue.
It was a valuation not seen for the smartphone maker in years – hence the sudden stock price surge.
True to Wall Street form, both companies immediately denied the reports.
Spokespeople said, “BlackBerry hasn’t engaged in discussions with Samsung with respect to any possible offer to purchase BlackBerry.” And Samsung said the report was “groundless.”
But the denials don’t pass the smell test.
Reuters cited awfully specific numbers for the claims to have been fabricated. Not to mention, the reporter said she’d reviewed actual documents.
Let’s not forget, either… BlackBerry’s CEO, John Chen, is famous for turning around another struggling tech company, Sybase, Inc., and then selling it for $5.8 billion to SAP AG (SAP).
Chen is a dealmaker – and a tie-up between these two companies actually makes perfect sense. Let me explain…
Why BlackBerry and Samsung Need to Make a Deal
There’s no doubt about it… BlackBerry is on the ropes. Sucking wind.
In 2009, BlackBerry was one of the world’s top-selling smartphone makers, commanding a U.S. market share of almost 50%.
Today, its market share has evaporated to just 1%.
While BlackBerry is doubling down on its software business – and gaining traction in the market – the company’s overall revenue continues to decline. Third-quarter sales fell to $793 million from $1.19 billion a year earlier. And handset sales still account for 46% of revenue.
As for Samsung… well, it’s struggling, too.
The company faces increasing high-end competition from Apple (AAPL) – even on its home turf of South Korea. The latest monthly report from Hong Kong market research company Counterpoint reveals that Apple captured a record 33% market share in South Korea in November.
Competition is also fierce in the mid-range of the market, too, where Chinese manufacturers like Xiaomi Corp. are threatening Samsung’s dominance.
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This impact isn’t just perceived, either… it’s measurable.
In the last quarter, Samsung shocked the market by reporting a 74% year-over-year drop in operating profit for its mobile business.
Add it up, and what do we have?
BlackBerry is trying to stave off obsolescence. And Samsung is trying to maintain its competitiveness.
So a combination of the companies accomplishes both objectives.
1 +1 = 3?
Despite its well-documented woes, one thing BlackBerry has consistently done well is innovate. The proof is in the patents.
Each year, BlackBerry ranks in the top 75 for patent recipients. For the last three years, it’s been granted over 1,000 patents annually.
All told, BlackBerry now owns about 44,000 patents, according to Desmond Lau, an analyst at Veritas Investment Research Corp.
In the United States, it holds 7,380 patents and has another 3,374 applications, according to MDB Capital’s PatentVest database.
Unsurprisingly, BlackBerry is trying to leverage these innovations to bring about a turnaround. But it’s no easy feat. And the last thing Chen wants to do is fail… and then watch scavengers devour the patent portfolio after a bankruptcy filing.
And scavengers are already circling.
As The Globe and Mail recently reported, BlackBerry “has shunned a handful of potential buyers in recent months.”
However, I believe Samsung represents a totally different buyer altogether. Because of overlapping and complimentary business interests, it would actually offer the best guarantee to BlackBerry that the value of its treasure trove of patents would be maximized.
Why? Consider this…
- Shared Internet of Things Ambitions: Chen views the IoT as a “major source of growth” for BlackBerry in the future. Ditto for Samsung. Not only did it acquire connected home startup, SmartThings, for $200 million last August, the firm also says all its devices will be connected to the internet by 2020. Combining forces with BlackBerry would allow the companies to capitalize on the opportunity more quickly and comprehensively.
- Shared Security: In November, Samsung inked a partnership to wed BlackBerry’s security platform with its own security software in Galaxy devices. But a Samsung acquisition would allow for a full-scale merger and rollout. That becomes more pressing in the light of the recent Sony (SNE) hack and the announcement that Apple and IBM (IBM) are joining forces to bolster their enterprise security offerings. Speaking of which…
- Enterprise Entry: Since taking the helm in late 2013, Chen has focused on providing software and security for governments and corporations. By contrast, Samsung is largely focused on consumers. As Colin Gillis of BGC Partners said, “How many Samsung phones do you see in offices? This would be Samsung’s chance to get into enterprise.” Agreed!
- Patent Defense: Apple and BlackBerry both cite the other’s technology in patent applications more than any other two North American device makers. Acquiring BlackBerry’s patents would give Samsung fresh ammunition in its ongoing litigation against Apple. In other words, the patents provide valuable offense and defense.
Bottom line: On a standalone basis, I’m less convinced about each company’s prospects. Particularly, BlackBerry’s. But together, they’d be a powerful force – and I do believe a deal is imminent now.
The best way to play it is with long-dated call options on BlackBerry. Specifically, the January 2016 $10 calls.
Ahead of the tape,