06 January 2012 at 9:29 GMT
Some basic balance sheet digging reveals what the minimum value could be for Research in Motion in the event of a break-up. Although the company has no debt and will not become insolvent, we can take the worst case scenario and see perhaps if there is a slight possibility of returning a profit in an RIM trade.
The current accounting book value of RIM is approximately USD 10.2 bn, while the current market capitilisation in USD is 7.89Bn, therefore giving it a P/B as of Q3 statements of 0.77x. If we want to eliminate any intangible assets that the company may possess, including a slew of patents, the tangible book value would most likely approach a value of USD 7Bn. We could be even more cynical and assume that the value of assets, like inventories, are reduced by 50 percent as well as reducing property, plant and equipment by 40 percent (we do not want to be too cynical as real estate tends to appreciate). If we go with this scenario the book value of the company falls to a mere USD 5.5Bn (shown in table 1).
The 5.5Bn ‘cynical’ tangible book value does not appear too appealing given the company’s current market capitalisation. But we can guesstimate the value of the company’s patents from a range of values that analysts have been assuming. The RIM patents under a full liquidation could reap between 2.5 bn to 7 bn according to analysts. So for a ‘Gordon Gekko style’ takeover deal, the company’s net assets could possibly be acquired for around USD 8 bn (5.5 + 2.5), pretty close to the current market capitalization.
If we want a larger margin of safety, we can pessimistically (or realistically?) assume that RIM will produce USD 1Bbn in cashflow in the next four quarters and the year after USD 0.5 bn, and then subsequently fall to zero (while consensus estimates of free cashflow are less pessimistic at 2.2 bn and 1 bn for 2013 and 2014 respectively). Without discounting the value of the cashflows, this would bump the value of the company to 9.5Bn in a ‘Gekko style’ takeover.
In this back of the envelope valuation exercise we can see that there is fundamental value left to be unlocked from investing in RIM even though it is currently the leper of the Nasdaq. As so it is said that ‘Fortune favours the bold’, so a confident investor might place a long position in RIM and wait for the fundamental value to possibly be realised.