Lenovo’s CEO indicated in early March to a French newspaper that his firm may have an interest in acquiring Research In Motion Ltd (NASDAQ:BBRY). The stock responded positively, and it’s been up in the mid-teens since the news.
This isn’t the first time rumors of a Lenovo (OTC: LNVGY) takeover have made their way around Wall Street. Earlier in the year, the CFO of Lenovo noted interest in buying the company then known as Research In Motion, during a discussion about his firm’s M&A strategy. Lenovo later said it was just open to a deal, not in active pursuit.
The comments in early March are more of the same, with the CEO just stating a deal could make sense. This was followed by the comment that Lenovo would need to “analyze the market” first. This, paired with another statement from the firm, indicates Lenovo has not even taken the early steps to acquire Research In Motion Ltd (NASDAQ:BBRY).
The size of the deal would present problems for Lenovo, with a market cap of slightly under $11 billion, buying Research In Motion Ltd, which has a market cap of $7.36 billion. Lenovo does have $4.4 billion in cash. It probably could get a deal done, but the level of debt would handicap the firm significantly for years to come. Research In Motion Ltd (NASDAQ:BBRY) is at a turning point with the release of the BB10. The outcome of its bid for third place in smartphones is anything but certain, and a deal at this point is very risky.
Release of BB10
Research In Motion Ltd (NASDAQ:BBRY) is in the process of releasing the totally revamped BlackBerry 10 around the world. BlackBerry has consistently lost market share for some time to Apple Inc. (NASDAQ:AAPL) and Samsung. More recently, the Windows Phone by Microsoft Corporation (NASDAQ:MSFT) has overtaken Research In Motion Ltd for third place in the US market. Other Google Inc. (NASDAQ:GOOG) Android phones have also penetrated the market at the expense of Research In Motion Ltd and it is clear Android and Apple Inc. (NASDAQ:AAPL) are the dominant players in mobile operating systems. The Android operating system is used by many companies like Samsung, HTC, LG, Motorola, and, of course, Google.
In late January, Research In Motion Ltd (NASDAQ:BBRY) unveiled the BB10 at the CES show to relatively positive reviews. Management believes the new phone will put the company on a path to gain market share and firmly establish itself as the number three player in smart phones behind Apple Inc. (NASDAQ:AAPL) and Samsung. Nokia Corporation (ADR) (NYSE:NOK) is also making similar bids for third place in the key end market. Microsoft has partnered with Nokia to launch the Lumia series of phones. Nokia could use a success as their phones have had disappointing sales in recent years.
The release of the BB10 in the US market, first by AT&T (T ) next week, is a key event for Research In Motion Ltd (NASDAQ:BBRY). In the US, a prolonged testing period from carriers delayed its release in this market and caused some concerns regarding the handsets. Initial channel fill purchases by the carriers look good, according to analysts, but until consumers start buying, it will be hard to judge the product’s success. It is uncertain whether initial sales to carriers were a result of channel stuffing by Research In Motion Ltd or actual expected demand.
Initial purchases will likely come from the 80 million current BlackBerry users worldwide, as they finally have an opportunity to upgrade.
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A positive reception from these users could then later lead to some adoption by Android and Apple owners. Success of the handset could also help slow or reverse negative trends in its enterprise email business, which is also problematic for the firm.
Conclusion
An acquisition valuation so dependent on a single event could spell trouble for Lenovo if the new BlackBerry proves anything but successful. It makes more sense to look at partnership opportunities with BlackBerry. If BlackBerry fails in its bid for the coveted No. 3 slot in smartphones, Lenovo could later have the opportunity to buy it at a more attractive price. And if BlackBerry succeeds, Lenovo could still benefit from the partnership.
The article Why This Tech Team’s Headed for a Partnership originally appeared on Fool.com and is written by Mike Thiessen.
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