BlackBerry’s Good Technology Acquisition Is Smart, Does It Impact Its Valuation?

BlackBerry (NASDAQ:BBRY), has agreed to acquire Good Technology, a key rival in the enterprise mobile management (EMM) market, in an all cash deal valued at about $425 million. ^[1] Despite some overlap in their respective product portfolios, Good appears to be a nice strategic fit for BlackBerry’s software business, as it will help improve BlackBerry’s cross-platform EMM support and bring in a relatively large and diverse customer base, while also helping to drive incremental revenue growth. Additionally, the deal, which will be the largest acquisition in BlackBerry’s corporate history, indicates that the management remains resolute about its software-focused turnaround plan. Below we review the strategic and financial aspects of the deal and how it impacts our view on the stock.

We have a $9 price estimate for BlackBerry’s stock, which is slighly ahead of the current market price.

See our complete analysis for BlackBerry here

Strategic Aspects Of The Deal

Addressing BlackBerry’s Cross Platform Handicap

BlackBerry’s mobile device management efforts had largely been tied to the proprietary BlackBerry operating system, and the company was late to the cross-platform game, as it only introduced the the multi-platform BES 10 EMM solution in 2013 with a follow-up called BES 12 in 2014. BlackBerry’s cross platform offerings still have some shortcomings, and this has proved a handicap in the current environment, where deployment models such as bring-your-own-device (BYOD) and corporate owned, personally enabled (COPE) have resulted in a diverse set of mobile operating systems in the workplace. Now, this deal should alleviate these issues to a large extent, since Good has strong expertise in multi-OS management with iOS devices accounting for 64% of its activations, followed by a broad Android and Windows customer base. This experience, combined with BlackBerry’s strength in BlackBerry 10 and Android management, should allow the company to effectively address various customers and their deployment models. Good’s success with iOS activations is very positive, given that Apple has been gaining share in the enterprise as well as the overall smartphone market.

Bolstering The Customer Base

The deal should help BlackBerry expand its customer base meaningfully. Good’s customer base includes more than 6,200 organizations, and the company is strong in verticals such as aerospace and defense, healthcare and financial services. Many customers in these verticals have abandoned BlackBerry hardware and device management software in recent years, on account of the company’s flailing device sales and weak cross platform support. Now, with the acquisition BlackBerry could bring them back into its fold, while up-selling its suite of professional security software and value added services such as document management and secure communications. BlackBerry intends to maintain both companies’ products as it develops a unified platform, which is expected within two years. ^[2]

Consolidating In A Fragmented Market

While the enterprise mobility management software market is expanding fast (27% growth in CY2014), it is also fiercely competitive, with a large number of small players, holding low levels of market share. For instance, according to IDC, the largest vendor in 2014– AirWatch, owned by VMWare – had a market share of 11.4%, followed by Good with 9.7% and BlackBerry with a 9.5% share. ^[3] With the Good deal, BlackBerry has effectively absorbed a key rival and bolstered its market position, possibly making it the largest EMM vendor after the deal closes. This sort of consolidation may appear all the more important with giants such as IBM and Microsoft – with their financial muscle and stronger enterprise software ecosystems – looking to make deeper inroads into the market.

Financials Of The Deal

Scope for Revenue Growth and Synergies

BlackBerry’s organic growth has been faltering in recent years and the deal does provide the firm scope to drive incremental revenue growth. BlackBerry expects to realize approximately $160 million in GAAP revenue from Good in the first year after closing, including the impact of an expected write-down of certain deferred revenue of Good. Moreover, Good’s revenue stream is stable and over 80% of the company’s revenues are recurring, according to S&P Capital IQ. Now, Good does have a sizable cost base (it posted operating losses of $83.9 million losses in 2014) and the company has been burning through cash. However, there are likely to be meaningful cost synergies that the two companies can leverage, since they operate in overlapping markets. Moreover, BlackBerry CEO John Chen has a proven track record of cost management at BlackBerry– having effected operational restructuring and several rounds of headcount reductions – and it’s likely that Good’s cash burn will be stemmed as the integration progresses (the deal is expected to close by Q3 FY’16). Additionally, BlackBerry expects to remain cash flow positive overall following the deal.

Putting The Purchase Price Into Perspective

While we reserve judgement on the true value that BlackBerry will be getting in return for its $425 million purchase, until we have a better idea of the magnitude of revenue and cost synergies involved, there are a few facts that indicate that BlackBerry is getting a decent deal. First, the sale price is less than half the $1 billion valuation Good received just two years ago, according to data from the Wall Street Journal. Second, with Good having just about $25 million in cash as of the end of last year, the company may have had less leverage at the negotiating table. ^[4] BlackBerry, on the other hand, can comfortably afford the sticker price, given that it had over $3.32 billion in cash and investments at the end of May.  Third, in terms of relative valuations, BlackBerry is paying just about 2x trailing revenues for Good. In comparison, VMWare’s 2014 purchase of EMM leader AirWatch was apparently closed at a whopping 15x trailing revenue multiple. ^[5]

We Still Remain Neutral On BlackBerry

While we like the acquisition and what it could do for BlackBerry’s software business, we remain cautious about the company’s long-term earnings prospects (related: Why BlackBerry May Still Be Better Off Sold). The company’s smartphone business continues to flounder amid weak uptake of its flagship handsets, while its lucrative service access fees (SAF) have also been declining at a steady clip (projected decline of 15% per quarter) as customers abandon its legacy BB7 platform. Now, the EMM software market that BlackBerry is betting on to stabilize revenues and drive growth represents a very small and relatively niche part of the broader mobile software space, with the overall market size standing at just $1.4 billion in 2014. For perspective, that’s less than half of BlackBerry’s sales over CY2014. Even if BlackBerry is able to make a big dent in this market going forward, its unlikely to mean much for its earnings or valuation upside.

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1. BlackBerry Press Release [↩]
2. BlackBerry to buy rival Good Technology for $425 mln, Reuters, September 2015 [↩]
3. Worldwide Enterprise Mobility Management Software Market Shares, 2014: Fragmentation Continues, But the Dust Is Starting to Settle, IDC, June 2015 [↩]
4. ‘Unicorn’ startup Good Technology sells for less than half its top valuation, MarketWatch, September 2015 [↩]
5. What VMware’s $1.54B AirWatch Acquisition Means For Enterprise Mobility, Forbes, January 2014 [↩]