What BlackBerry offers Google, Apple and MicrosoftAugust 13, 2013: 1:10 PM ET
Secure data isn't the only offering from the struggling company.
By Cyrus Sanati
FORTUNE -- One of the "Big Three" mobile computing giants – Google, Apple or Microsoft - could win big by picking up a loser: the once great BlackBerry. Despite its poor sales and sad marketing, BlackBerry (BBRY) actually has a great deal to offer a strategic acquirer with its secure data network, loyal corporate clientele and slew of valuable patents. But that's not all. Such a deal also offers some sweet tax advantages for the Big Three as Blackberry could possibly be paid for using foreign earnings that have yet to be taxed by U.S. authorities.
BlackBerry's failure to admit defeat has come at a great cost to its shareholders. In 2008, the mobile pioneer had a market value topping $84 billion and commanded more than 50% of the smartphone market. Five years later, the company's market value, as of the close of last week, came in at $4.8 billion, while its share of the smartphone market had fallen to a pathetic 3%.
The company made many missteps during that time, but, in a nutshell, BlackBerry missed the boat when it came to developing bespoke applications that made using the mobile web easier and faster for consumers. It also took years to offer a truly usable consumer-focused touch screen with a decent operating system.
The unveiling of the "BlackBerry 10" series smartphones and operating system earlier this year were valiant attempts by the company's new management to reenter the consumer market. The phones were comparable to other high-end phones on the market, and the operating system was smooth and relatively easy to use. But the 10 wasn't a game changer in any sense of the word and was simply too little too late. Consumers had already been locked into either Apple (AAPL), Google (GOOG) or Microsoft's (MSFT) operating platforms. Moving from one of the other platforms back to BlackBerry would have entailed large switching costs, which ultimately proved too high of a hurdle for consumers to leap over.
On Monday Blackberry formally announced that it had formed a special committee to explore strategic alternatives that would "enhance value and increase scale in order to accelerate BlackBerry 10 deployment." The company said it was open to all alternatives, including "possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions."
Going private doesn't really offer Blackberry any real advantages at this point. It would have been better to do so a couple years ago or during the leverage buy-out boom, but not today. Sure, it is easier to chop up and sell the company while it is private, but Blackberry's assets have a degrading shelf life. The time it would take to rustle up all the offers and to go private and then to negotiate deals is too long of a time table. The 10 series would look ancient by then and the company would have burned up more of its $3.1 billion cash pile for nothing. The time to sell BlackBerry to a strategic competitor is now, not tomorrow.
Apple, Google and Microsoft could each leverage Blackberry's platform to make them more competitive as the three companies wrestle for the last bits of the smartphone market. For example, the iPhone's iMessage feature, which allows users to send free text messages to other iPhone users, has been an easy and cost effective way for Apple to lock people into its network. There is really no universal equivalent of iMessage on Google's Android operating platform or Microsoft's Window's platform, yet, despite rumors that they both were developing such a system. Blackberry's BBM system is similar to iMessage and is extremely popular in places as diverse as the United Kingdom and Haiti. Incorporation of BBM into their platforms would not only put Google and Microsoft on equal footing with Apple in the free text market, but it would also give them a built-in set of consumers from around the globe who can help spread their platform to other users. That alone could be worth billions of dollars of future revenue down the line.
In addition to BBM, BlackBerry offers the Big Three something none of them have but could really use – a truly secure data network. This is probably BlackBerry's strongest advantage. Sending and receiving emails through the BlackBerry data network provides a much safer conduit for businesses that want to keep their communications private. BlackBerry customers include all the large Wall Street banks as well as the Department of Defense. These clients have servers hardwired into their IT infrastructure that allow them to access the closed BlackBerry network and provide a safe and relatively secure way for their employees to send and receive emails and data. The technology behind the network is protected by thousands of patents, which some have estimated to be worth as much as $1 billion just on their own.
In addition to the technology, Blackberry also offers a buyer some significant tax advantages. Google, Apple and Microsoft have billions of dollars of cash parked offshore gathering virtual dust in foreign banks. The Big Three accumulated these cash piles by selling their products and services through their numerous foreign operating subsidiaries. The amount of cash we are talking about here is simply staggering. At last count Google had $33 billion; Microsoft had $61 billion; and Apple had $83 billion, according to U.S. PIRG, a federation of public interest research groups. Normally a company would redistribute that cash to its shareholders, not just sit on it. But since the cash was made abroad, it hasn't been taxed by U.S. authorities.
The only thing these companies can really do with their cash hoards would be to somehow reinvest it abroad in some sort of foreign venture. With few capital projects on their plate, the money has just be piling up. But they don't have to build something – they can also acquire something. Blackberry is a Canadian company and could be acquired using funds from the foreign reserves.
This is not an unprecedented move. For example, Johnson and Johnson, aided by its bankers at Goldman and JPMorgan, devised a scheme that allowed it to use part of its foreign cash pile to acquire Swiss medical device maker Synthes last summer for nearly $20 billion.
Microsoft used $8.5 billion of its foreign cash hoard to acquire Luxembourg-based Skype in 2011. Clearly it isn't shy about making big acquisitions and seems comfortable tapping its untaxed foreign cash hoard to make it happen. Microsoft has been struggling to break into the smartphone market for years now and acquiring Blackberry could allow it to gain an edge within the corporate arena. Pretty much every major business in the U.S. uses Microsoft Exchange servers for their email, so acquiring Blackberry would have the added benefit of securing its leading position inside U.S. corporate IT infrastructure.
Apple has never done a multi-billion dollar acquisition, but it may be time to break that streak. It has been rapidly losing market share to Google's Android platform, which spans an array of devices, including Samsung's Galaxy line of phones. Meanwhile, the company's revenue from its iTunes store is under attack by all-you-can-eat music services, like Spotify, and film and television services like Hulu and NetFlix (NFLIX). Gaining a secure network would set the iPhone apart from other smart phones and would instantly make the iPhone the choice for Corporate America.
Google has done big deals in the past, like its acquisition of YouTube, DoubleClick and Motorola Mobility, so the company isn't afraid of dropping some major coin on what it wants. Adding features from Blackberry's 10 operating system would help smooth out some of Android's rough edges while adding BBM would allow it to finally compete against Apple's iMessage. Google's Android apps already interface well with the Blackberry 10 line of phones, so synergy with existing software and hardware should be relatively simple.
Years of complacency and mismanagement turned Blackberry into a shadow of its former self.
The company now lacks the distribution platform to make a comeback. Nevertheless, Blackberry still has some hidden gems locked up in its vault. By using virtually tax-free cash, Google, Apple or Microsoft can take those gems for a song and use them to gain an advantage in escalating struggle for dominance in the mobile market. It now all comes down to price.