Submitted by Sitanshu Singh as part of our contributors program.
The recent turmoil and saga of Research in Motion prompted me to do an equity valuation company stock. Based in my very conservative sales growth assumptions I placed a value of $10.50/common share. The assumptions for the valuation are as follows:
This valuation is a few cents lower than the value we get if we do the following:
(Current Assets) – (Inventories) – (Deferred Income Tax)-(Income Tax Receivable)
#outstanding common shares
(7,056MM) – (1,027MM) – (197MM)- (135MM) = $10.87/share
The shares are closed today in the $6.80 range.
RIMM is now ripe for one of three outcomes:
- The company will drag along until it releases Blackberry 10. The value of the shares will rise.
- It will be subject of a takeover/angel investor offer and hopefully a bid that will allow the share prices to rise.
- Blackberry 10 is a failure, there are no investors and RIMM fails and its actions auctioned off.
RIMM is running short on cash and by most estimates it is assumed that the company will not be able to support operations until the release of Blackberry 10. However, this risk seems a bit overstated as the (Current Assets) – (Inventories) – (Deferred Income Tax)-(Income Tax Receivable) is greater than the total liabilities for fiscal year 2012 and even the 2013 Q1.
Keeping this in mind, the takeover/angel investor option most preferred and quite likely. However there are a few challenges. The takeover battle will culminate with inflow of funds and restructuring of the company’s management.
- The winner of the takeover battle will likely try to use their new position as the new ‘owner’ of the company to borrow funds to finance Research in Motion’s restructuring.
- The new owner’s ability to restructure the organization will depend on the controlling investor’s ability to affect the required changes.
- This is where the challenge will come from. It is likely that due to the labor, pension and insurance laws may prevent the new investor from achieving the goals.
- Similar hurdles may be created by unions.
Finally, the challenge may come from “keep Canadian companies Canadian” element of the society to exert pressure on the government to veto any foreign investor from taking over RIMM, as was seen in the PotashCorp deal failure.