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RIMM - Liquidation Value

May 30, 2012 | About:
RIMM stock price continue to collapse as uncertainty about their future weighs in. The Android phones and Apple iOS phones continue to grow their market share at the expense of others. As we have observed, the mobile industry thrives on a rapidly changing landscape, and survivals are those that are able to constantly innovate themselves to stay ahead of competition.

Such industry generally does not make a good case for investing, as business fundamentals can be eroded easily overnight. RIMM makes a perfect example and we would not have considered it as a sound investment to begin with. However, extreme pessimism has been priced into the stock price and the value might be too compelling to ignore at this moment. Though we shall make clear that our investment thesis would be based solely on RIMM ‘s liquidation value instead of their business fundamentals, which we have no interest to analyze or make predictions on.

Liquidation Value

Graham Net Nets

To provide us with enough safety margin, we thought the best way to calculate liquidation value would be using Graham’s Net Nets Working Capital.



Graham Net Net Working Capital


Actual


%


Reduced


Cash


1527


100%


1527


Short Term Marketable Investments


247


100%


247


Accts Receivable


3062


75%


2296.5


Other Receivables


496


75%


372


Inventory


1027


50%


513.5


Other Current Assets + LT Investments


702


75%


526.5


PPE


2748


50%


1374


6856.5


- Total Liabilities


3631


Per Share


6.15


As shown, we have marked down receivables on the balance sheet by 25%, with Inventory and PPE by 50%. Their PPE consists of Blackberry infrastructure and network, which we believe would not be worth as much compared to assets such as lands and, buildings. After taking away total liabilities, we arrive at a per share value of $6.15 which is substantially below the current stock price of $11.

If RIMM ever trades close to this price, we would gladly buy it and we will make sure we buy enough of it. That's the bargain price we hope it will one day trade at. Of course, it is unlikely and the market would have given some value to its patent portfolio and subscriber base of almost 77 mils Blackberry users.

Graham Net Nets + Subscriber Base + Patent Portfolio

So lets just give some credit to these two other assets that they have. If you look up analysts’ reports, articles online, you will end up getting quite a wide range of valuations for these two assets. Anyone’s guess is as good; for us, we shall base our valuations on past market transactions and establish a low to high case scenario.

First, lets look at the subscriber base:



Subscribers Valuation


Subscribers (mils)


Purchase Price (mils)


1


Skype


170


8,000


2


RIMM


77


% of purchase price


20%


40%


60%


Valuation per subscriber


$9


$19


$28


Low


Mid


High


Valuation


$725


$1,449


$2,174


Per Share


$1.38


$2.77


$4.15


Microsoft purchased Skype’s 170mils subscribers for almost $8bils back then. This might seem to be a rather lofty price from hindsight, so we have used the Low to Mid to High case, discounted to 20%, 40% and 60% of the Microsoft’s purchase price accordingly. The valuations are shown above, with the lowest at $9 per subscriber to as high as $28 per subscriber.

Patent Portfolio Valuation

Next, for the patent portfolio, we have used the following market transactions to come up with the ballpark for the average purchased price per patent:



Patents Valuation


1


Microsoft purchase of Novell patents


510,204


2


Microsoft purchase of AOL patents


1,141,622


3


Google purchase of Mortorola Mobility


735,294


4


Nortels patents


750,000


Ave.


784,280
Price / Patent

Low


Mid


High


RIMM Valuation of 3936 patents (mils)


$2,008


$3,087


$4,493


Per Share


$3.83


$5.89


$8.57


It ranged from as high as $1,141k/patent for the AOL patents to 510k/patent for the Novell patents. The average at $784k/patent would seem to be reasonable as RIMM purchased the Nortels patents recently at a transaction value of about $750k/patent.

We did some digging and managed to find about 3,936 patents that are assigned to RIMM from the U.S. Patent and Trademark Office. Using the prior figures, we value RIMM’s patent portfolio to be anywhere from $2bils to $4.5bils. The Wall Street analysts seem to disagree with each other so much over the valuations that they came up with an all too wide range of $2bils to $10bils!

Adding up the Numbers



Low


Mid


High


Graham Nets


6.15


Subscriber Base


1.38


2.77


4.15


Patents


3.83


5.89


8.57


Per Share


$11.37


$14.81


$18.87


Upside


3.34%


34.62%


71.58%


At the current price of $11, the base scenario is still higher by 3.34%. We believe the calculations made here is rather conservative, as we have marked down all the necessary components as if in a fire-sale scenario.

However, after putting down all the numbers, it seems that the risk-reward scenario is still not sufficient enough for us to make any investment. We would prefer to be buying at a price where we get the entire subscriber base and patent portfolio for free, though we might be a little bit too greedy on that.

RIMM’s 4Q 2012 Business Updates

As we are writing this Post, RIMM’s CEO Thorsten provided some important business updates to the public yesterday.

Positives:

- Subscriber base increased to 78mils

- BBM user base has grown to 59mils (we have not even factor this in, take it as a free gift!)

- Successful launch of two new BlackBerry 7 phones in India and Latin America

- Progress being made and enthusiasm surrounding their BlackBerry 10

- App growth of 220% y-o-y

Negatives:

- On-going competitive environment, resulting in lower volumes and highly competitive pricing dynamics

- Q1 results anticipated to be at an operating loss

(Source: http://www.virtual-strategy.com/2012/05/29/research-motion-ceo-provides-business-update)

The good news to us is rather that people are selling out on RIMM due to the news of their operating loss. We have expected that to happen given the drastic transformation the CEO is making throughout the organization. Good news to value investors especially as the news send the stock price down almost 7.3% after-market to $10.41. Still not yet low enough for us, so lets hope it drops further (existing shareholders please don't kill us for saying this).

Probably when it reaches close enough to Graham Nets number, we will relook at it again.

Till then, we welcome all to share any views you might have on RIMM.

(valueground.blogspot.com)

About the author:

Valueground
We are a 2 partners team managing a concentrated portfolio, with the intention to hold our investments for as long as the fundamentals stay intact. We do not chase, nor wish to participate in the short-term race for returns, choosing instead for the best opportunities to invest in. The time we do so is the time we invest big, taking outsized stakes in what we call the “misguided & misunderstood” investments. Contrary to many, we subscribe to the notion of low risk, high return.

Visit Valueground's Website


Rating: 4.1/5 (20 votes)

Comments

cdubey
Cdubey premium member - 2 years ago
Your claim "the intention to hold our investments for as long as the fundamentals stay intact" does not hold water when your portfolio completely changes 4 times during 3 months ! Have the fundamentals of all these companies deteriorated so much in such a short time ? In particular since Feb you have done the following

  • Bought and sold out Radioshack (probably at a loss).
  • Bought and sold Exco resources (probably at a loss, given that you bought during March and sold during April).
  • Bought and sold Research in Motion (probably at a loss).


How do you justify something like this given your claims in the "About the author" section above ?

cdubey
Cdubey premium member - 2 years ago
More to the point: an excellent write up.

In my opinion, even if RIMM is very cheap, I will not invest. There is a lot of risk with this investment. Aren't there much safer ways of making money ? Why not buy Philips for example, or Vivendi which also trades for a lot less than the assets involved and pays a hefty sustainable 8-9% dividend and is not on the precipice of its business becoming obsolete.

As a side note, even though Prem Watsa has bought a lot of share, I find myself at odds with his investment philosophy. I would not follow him and put my money in his other investments either(like Resolute Forest Products and Bank of Ireland).
asdf321
Asdf321 - 2 years ago
No - You really aren't doing "fire sale" analysis. You write well and have researched publicly available numbers. But the business of finding a home for tech orphans and basket cases is a great deal more complex than that.

In the absence of a great fit - which is always "in the eye of the beholder" - like Microsoft/Skype - you take your low numbers, cut them in half and probably cut them in half again, because while the assets can be valued the "rot" in a company like RIM is not that easy to spot until you own it.

Plus, you have to think that some of the people employed there are integral to its "value," and most of them will be gone before the ink on deal papers dries.

In particular, those subscribers will be viewed by potential acquirers as very much "at risk." And since the strategy was heavy on "volume commitments" (a company "signing up" hundreds, if not thousands, of employees), the situation is even worse. And those patents. This is not "by the pound" or "by the patent" stuff, and pretending that it is is ludicrous. ONE or a dozen "good" patents may be worth a billion or more. There's no way to know - but I obviously am skeptical - whether RIM has any of those in its "portfolio."

Others wrote at 15-30 in the last 6-9 months that there's such a thing as a "value trap." You SHOULD know the term, and I'm sure you do. But if the earlier comment that you have already bought and sold RIMM (you had some good company, like Cooperman and Einhorn) is accurate, it's obvious that your model needs some tweaking. I remember reading that Buffet consigned tech as a whole to a "you can't run the numbers and evaluate, so leave it alone" status. It strikes me as even less likely that Graham would have fallen into the trap you have.

PLUS, while the best buys come at uncertain times, they are that, when they are, because one scoops up assets at ridiculous prices. HP's failure with Palm is another simple event that enforces something like a 50% of whatever you think is "stealing the company."

Last, a failed company that was as complex as RIM - phones, subscribers, network, tablets - will almost surely have to be carved up, and I'd argue that this is NOT a case where that will work in RIMM's favor. Maybe, one asset will get a respectable offer - like Motorola was ostensibly bought for its patents. But just as you said "the messaging will be a freebie," so will some of the ones you hung 9-digit numbers on. Yes, I'm still short the stock, and I bemoan even the current management's having bought matters to this point, but I hope you and your readers hold off until $7 or 8, even in terms of THINKING about this as an opportunity.
batbeer2
Batbeer2 premium member - 2 years ago
>> I remember reading that Buffet consigned tech as a whole to a "you can't run the numbers and evaluate, so leave it alone" status.

I'm willing to bet Buffett never said such a thing. He may have said he couldn't do it, it's not his style to tell you what you can't do. In any case, he has no way of knowing that..

A summary of your comment as I see it:

1) Thanks for trying but RIMM is too tough to value.

2) I'm short.

There is a clear flaw in that line of reasoning. Just because you got away with it doesn't mean you didn't take a lot of risk.

Just sharing my thoughts.

portfolio14
Portfolio14 - 2 years ago
Your analysis is similar to what I wrote last month.

But you are double counting. e.g. If you liquidate the PP&E, you don't have the network infrastructure to support the BBM subscriptions.
kfh227
Kfh227 premium member - 2 years ago


Why so compliated?

This copmapny is growing it's cash horde quarterly while producing postiive free cash flows.

So long as BB10 is not a flop. I don't even care about success. Jsut don't flop and get some share in India. That's all that is needed. I could care less if BB10 fails miserably in the US. There is more than one market out there.

Based on all this, I don't see why RIMM can not continue to make $2B in FCF in the future.
asdf321
Asdf321 - 2 years ago
Batbeer - Your "correction" re Buffet is accurate, but the whole point of the o.p. was to reason "Buffet-like." I'm saying that that's like using a wheel to eat spaghetti. Both have their virtues, but they don't work well together.

And you seem to miss my key point that fire sale means fire sale. "Liquidators" (you do know that that's a profession and a "niche") don't "sample patents," and they wouldn't even if they were handling a tech company. Intangibles are routinely assigned the value that logic (in a ruthless way) often assigns them - ZERO.

So, you get - as literally hundreds have before this offer - a number that LOOKS enticing. A number that's usually close enough to the current price, so one's instinct is "The market is efficient. This last 8% down was 'de trop.' "

Uh Uh in this case - and it's not because I have a short position. Palm wasn't quite liquidated, but the low price it fetched proved to be too high. None of us have the memories we should have - i.e., it's the rarest bird who learns all there is from experience - but companies with a spare billion or 5 are not run by Alz. sufferers. They may balk at comparing RIMM to Nortel (rightly or wrongly), but just as real estate is anchored to "comparables," RIMM's similarities (AND THEY ARE ENORMOUS) to Palm are going to make cautious (yes, I'd accept "low ball") valuations even lower.

The author missed that, and methinks you do, too.

As for the other poster after me, (a) BB10 would have to be a home run; and (b1) even that might not be enough; (b2) the odds of that, given that Waterloo must resemble the E-Trade ads of old with monkeys running things, are awfully low.

Seriously, can you think of a reason beyond being overpaid why someone would still be working there? Believe me, mostly they have folks who say and think, "This sure beats being an intern." Somehow, it seems to me that the likelihood that they can go toe-to-toe with Apple employees isn't all that high.
cdubey
Cdubey premium member - 2 years ago
@Asdf231: Going short on RIMM is quite risky in my opinion. You might end up making money, but that does not mean that you did not take risk.

RIMM might be acquired because of its patents ... and people generally overpay when acquiring. Look at Instagram for example. Can you be sure that someone will not overpay for RIMM by acquiring it at a price which is 50% above the current price ? Skype was acquired for $8.5b. A similar sum for RIMM might not be too large to imagine.

I am not claiming that your value (or lack of value) thesis for RIMM is wrong. But at low prices, it gets more and more risky to short.
asdf321
Asdf321 - 2 years ago
I'm not alone - somebody ran down the "possibles" and said "LG, maybe."

Of course, it's early days - OR IS IT? - in terms of the company being shopped.

But I'm really of the opinion that the day Mike yielded to Thorsten, everybody and his brother (who might have been maybe possibly considering buying all or part of RIM) got the word that any reasonable offer would be considered.

I think it's a cardinal rule of investing that if the best case you can make for buying a stock at crazy high levels is that there might be someone stupid enough to pay even more for it ... well, you probably shouldn't be investing - if you could even call it that. (That strikes me as the bull case - as of now - yes, maybe, Microsoft will bear-hug RIMM at $20.... C'mon, you don't believe that, do you?)

As I told someone earlier today - you'd have thought that this belated PUBLIC announcement that ALL alternatives will be seriously considered would have goosed the stock. Heaven knows, those rumors have done the trick many times over the past year - Samsung comes to mind earlier in 2012.

But no. Only a ton of shorts covering (no, I don't know why, exactly) has kept the stock in double digits and I've traded this stock enough to suggest that the odds favor that "artificial" support drying up and our getting to the distress levels people sold at after hours yesterday when the news first came out.... AND SOON.

Instagram wasn't bought for its patents, and the Skype situation is different principally because that was a GROWTH COMPANY - and not in its distant past. Just as the longs have gone on record ever since RIM broke through "book value" on its long journey south that "This CANNOT BE. Gravity or something like it mandates that it get back to 30 or 20 or whatever."

... now they knee-jerk, "What's the risk reward ratio at these levels?" Remember, if - I guess you haven't quite swayed me - a lower and lower stock price for RIMM is almost a sure thing, betting on that is more like arbitrage than it is like the speculation you deem it.
kfh227
Kfh227 premium member - 2 years ago


have options. Will buy more. IfRIMM keeps dropping, I'm buying more calls. Hoping it gets to $8 so I can get some free jan 2014 calls at the 35 strike.

By that time, RIMM will be dead or trading at over $100/share.
glavacem
Glavacem - 2 years ago
francis chou says rimm patents alone are worth 13 a share.

Please see the attached meeting notes from the fairfax financial annual dinner. Chou's comments on RIMM are at the end. The meeting notes themselves are a very good read. http://www.ndir.com/SI/articles/FFH_Dinner.pdf

valueground
Valueground - 2 years ago
As we have expected, the Longs and Shorts of RIMM both have a strong case to make, however, there is no right or wrong when comes to investing. What that matters eventually is to have sufficient safety margin to guard against permanent capital loss. NEVER LOSE MONEY!

To Cdubey:

Thanks for checking out our blog as you mentioned about us buying and selling out RIMM, RSH and XCO in such short period of time.

As for investing, its always about capital allocation. XCO, RIMM, we believe presents compelling valuations at the price they are traded at during that time. The thesis for us buying in, instead, lies in coinvesting with gurus like Wilbur Ross, Prem watsa which we believed are capable of unlocking the value in these companies. Without which, we would not have invested.

(P.S. except for RSH which we confess, greediness overcame us!)

But as more facts unfold, it became clear to us that the best investments lies in the current two positions we are invested in. Hence, notice that we pare down all our positions eventually.

(check out http://valueground.blogspot.com/p/portfolio.html)

To Asdf321:

Seems like you make quite a bit of money shorting the stock. Congrats!

We do agree with you on your notion about RIMM. As we have mentioned, there is no way to valuate them at all due to the nature of their business. Thats the reason why we would only consider it as a cigar butt investment if it gets close to Graham Net Nets number. Notice that we wrote this Post on its liquidation value, not on its business and predicting what will happen in the future.

However, we do believe there exists value in their patent portfolio and their subscriber base. You can be conservative by marking down all of that. But imagine this, the Nortel patents which they are part of a consortium buying it for 775mils, would already show that there is demand for it in the market. They are also the only smartphones certified for use for government agencies and that would suggest at least some value in their BBM network and infrastructure.

While we are not here to debate on that, lets wait for the price to drop further; after which, you would have profited quite a fair bit, and we can buy in to have a last puff of value they have.

Again, if one could buy in close to the Graham number, you could either get a last puff, or best, if they managed to turnaround, a huge return!

“heads I win, or tails I don’t lose much” Mohnish Pabrai

(valueground.blogspot.com)

sww
Sww - 2 years ago
We have 3 baskets - In, Out & Too Hard. RIMM - too hard.

If you own a company that will make you lost your sleep tonight, you probably should not own it in the first place.

robbieboggie
Robbieboggie premium member - 2 years ago
You are missing the value of their REAL ESTATE....
robbieboggie
Robbieboggie premium member - 2 years ago
How much does a Skype subscriber pay and how much does a Blackberry subscriber pay? How can you compare the value of the subscribers? Hardly believe the President of the US would use Skype. You are tripping on the analysis which sucks.
robbieboggie
Robbieboggie premium member - 2 years ago
If someone understands Benjamin Graham it is Prem Watsa. I say only one thing. LONG ALL IN RIM. Downside you make a 100% return on your cash at todays price. Upside you make 10-100x your money if they succeed.
robbieboggie
Robbieboggie premium member - 2 years ago
Also, all hobby Wallstreet economist don't understand QNX. The very reason you are at this page reading this is that QNX is powering its servers. Your patent valuation is based on that you don't know anything about technology. In bad times fundamentals get undervalued and in good times they get overvalued in the statements. Theory of Reflexivity. Do some reading on QNX before talking about what RIM has or has not. Try using Windows or iOs in an airplane or car and I wish good luck to your health. Again do some real research before posting bullshit.
robbieboggie
Robbieboggie premium member - 2 years ago
Anyone that is betting against RIM at the moment should stop calling himself a Value Investor. And if you are not long then again you have not understood anything about value or Benjamin Graham. I suggest you continue being short and we will continue buying and when in 5 years your Apple shares crash and we cash in a 10-100x return I will go back to this page and post from my new Yacht.
robbieboggie
Robbieboggie premium member - 2 years ago
The cell phone market is 6 billion units so there is lots of room for competitors. 1.2 billion units are sold each year.
superguru
Superguru - 2 years ago
Why are gurus choosing RIMM over Nokia?
robbieboggie
Robbieboggie premium member - 2 years ago
Cheaper and more upside. Probably because they are American and not located in the Nordics...

This is interesting: Not so long ago the pundits and the media called RIM the fastest growing company in the world... Just before it crashed...

http://money.cnn.com/magazines/fortune/fortunefastestgrowing/2009/full_list/index.html

Now... they are saying it is doomed

http://www.forbes.com/sites/benzingainsights/2012/05/31/should-research-in-motion-sell-blackberry-and-call-it-quits/

A classic buy at the top and sell at the bottom. It is interesting how people and the minds of people work... We are Lemmings.
robbieboggie
Robbieboggie premium member - 2 years ago
And 60% of all cars on the roads are powered by QNX...

Also QNX is POSIX compliant while all other systems out there are POSIX slave which means in theory all other OS could be run on QNX.
robbieboggie
Robbieboggie premium member - 2 years ago
People don't understand this yet but QNX is the OS of the future while iOS and Android are the OS of 5 years ago.

Yes we all have iPhones and iPad's but if ask yourself deep is it not true that your devices suck.

You can not multitask. You can not use flash i.e. surf normal sites properly. You can not run normal programs but all this bubble app mania. You are still using a normal PC while the goal of QNX is to make a computer out of their device not a passive reading pad.

robbieboggie
Robbieboggie premium member - 2 years ago
QNX runs Cisco servers etc. I.e. Google and Facebook and other crap use their software for making their sites work. I.e. QNX does not crash i.e. that is why NASA and the likes use it.

Again if you want your car to be run by iOS, Android or Windows then hey better get some good life insurance.
robbieboggie
Robbieboggie premium member - 2 years ago
A place to get your insurance is probably AIG but you are probably short for that company too for the same reasons as before. You love buying at the top and selling at the bottom and writing long analysis about it.
robbieboggie
Robbieboggie premium member - 2 years ago
Hey Valueground why don't you put to be,CONSERVATIVE, as you say ONLY 5% of the total car market not 60% software value in your analysis in your excel sheet. You sound as one of those banker people I used to work with that sit night and day and run numbers is spreadsheets building "complex" models and analysis without understanding anything.
peter_burke_ceo
Peter_burke_ceo - 2 years ago
qnx will be an utter and complete failure on bb10. it's 2 years too late.

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