Research In Motion

Company Valuations

I.

Executive Summary
Research in Motion (RIM) is the company that designs and develops the Blackberry line

of high-end smartphones. This line of smartphones has become very common among
professionals and non-business users. RIM sells the Blackberry smartphones to consumers
and businesses around the globe. They mainly sell their products through mobile phone
operators, such as Verzion, AT&T, T-mobile, Vodafone and mobile phone retailers.
The development and selling of blackberry handsets is RIMs main operation, but not its
only. It also maintains a worldwide data network; in order to provide blackberry customers
with data transferring services, as well as it creates corporate communications solutions.

Although enjoying increasing market share in the mobile handset industry, it faces an
increasing competition from other mobile device developers, such as Motorola which is
adopting the fast-developing Google Android OS and Apple with the iPhone platform. The
industry is also changing its focus from increasing revenues from data services rather than by
calls or SMS messages.

The graph is purely illustrative of RIMs operations and does not express our analysis or valuation. It was taken from
www.trefis.com

II.

Company Overview
1. Research in Motion Description
Research in Motion (RIM), was founded in 1984 with its headquarters located in

Waterloo, Ontario, Canada. It has offices across Europe, Asia and North-America. It wasnt
until 1999 when RIM launched the Blackberry smartphone, which was led by co-CEO Jim
Balsillie and Mike Lazardis.
Research in Motion finds itself in the middle of the world mobile communications
market. RIM is considered to be a leading designer, manufacturer and marketer of innovative
wireless solutions for mobile communications. They started as a two-way paging network
competitor with Skytel. Since new technology has become available RIM jumps to working
with additional networks which includes: GSM, CDMA and IDEN networks. Their main
marketing sales point and target market revolve around todays business man who looks to
stay connected to his profession continuously. RIMs portfolio includes the blackberry
wireless platform as well as the RIM wireless handheld product line, software development
tools and Bluetooth technology.
The major strategy in marketing and product development is the ever changing
generations of blackberry models as new technology evolves. Primarily the Blackberry is
known for its ability to send and receive e-mail wherever network service coverage is
available or through local wireless network connectivity. Third party application brought in
capabilities of the Blackberry allowing for customization per consumer. Currently RIMs
Blackberry holds a 14.8% share of the worldwide smartphone market. This position ranks
them as the fourth most popular platform.
2. Analysis of the industry
During the period of 2007 to 2009, the Diversified communications Industry saw the rise
of a dominant trend for a whole industry shift towards smartphones. End-User demand has
changed to devices that provide access to internet features, such as email, social networks and
feature-rich applications, forcing the smartphone operating systems to become more open to
further enable mobile devices to work like actual PCs. From the supply side, opportunities to
increase data ARPU (Average Revenue per User), as opposed to diminish voice ARPU, make
the eroding operations of voice communications open space to new profitable operations.
This trend and factors have also been consolidated by the evolution of networks from 3G

technologies to 4G and the adaption of the industry to the new standards and possibilities.
Adding to the technical/specifics of the industry, during this period the Global Economy went
through a major financial crisis, which in the case of the Handset industry led consumers to
decrease demand, retailers to maintain tight inventory and a the first decrease in handsets
shipments in almost a decade.

The smartphone industry can be split into two categories of operations. The first, are
the operational systems used in devices. The characteristics of each OS can have relative
advantages to other systems, such as support to different technologies, user-friendly or
business-friendly, and system openness as compared to other systems. The second category
are the manufacturers of mobile devices, that have to choose on one or more OSs to base its
products in order to reach desired segments of markets. In the observed period, we saw the
growth in usage of Apples IPhone and RIMs Blackberry, and the surge of Googles open
platform Android in 2009. On the other hand, widely dominant manufacturer Nokia and its
Symbian OS had sharp decreases in market share, while still maintaining leadership, as well
as the fact that Microsoft was slowly concluding its Windows Mobile OS development to
focus on new releases.

Taking our scope to RIM and Motorola, RIM has chosen the strategy to conform its
OS and devices to the needs of its Solution provider operations, while Motorola chose to,
through agreements with OS developers, to design smartphones to its categories. After a nonwell resulting bet on Windows mobile, Motorola, Inc. has been going through a repositioning
process that resulted in the adoption of the Android OS and the release of 6 android based
smartphones in 2009.
III.

SWOT Analysis of Research in Motion

The SWOT analysis is a model to structure different external and internal

perspectives on the context of the observed business. It considers the business Strength and
Opportunities on one side and the Weaknesses and Threats on the other side. This model can
be very useful to understand or predict the positioning of the company.
Internal Factors
Strength

Weakness

RIM brand is very powerful

The Blackberry architecture

Cross platform software capability

RIMs business model is not carries-

Strong R&D team with lots of

friendly
Scalability and global coverage

innovative ideas
RIMs unique offering and strategy

External Factors
Opportunities

Threats

Brand Loyalty
Extend

the

Competitive products
range

of

third-party

Blackberry devices
Global growth and expansion

After composing the SWOT analysis, we can conclude that RIM has positioned itself
as a high player in the market by customizing its devices and their functionality to diverse
consumers recipients from personal use to business/corporate solutions. This positioning has
caused difficulties in adapting its services to carriers specifications and interest.

IV.

Investing in RIM - ROIC and NPV values2

Competing in the mobile handset market, Research in Motion is one of the main competitors,
being the only one to use and develop the Blackberry system and network. Currently, there
are three main platforms for mobile handsets, Android, Apple's IPhone and RIM's Blackberry.
The Blackberry platform distinguishes itself by offering customers a privately managed
worldwide network, being a leader for Businesses' services.
Although it still faces operational risks, such as massive customer substitution of their
blackberry and possible technological difficulties, as the only developer of its operational
system and manager of its network. RIM has had a remarkable performance, almost doubling
its revenue size per year during the period of 2007 to 2009. Another significant factor when
analyzing this growth is the absence of long term debt, while short-term debt can be
associated with operational issues, rather than obtaining capital.
The growth in previous years with no debt meant to shareholders exclusively capital
gains, while no dividends were paid until present. To understand the financial implications of
the dynamics of previous years, we decided to analyze the company in the following way. As
presented in the first part of the project, the quantitative information is taken from RIMs
financial reports for the period of five years (2006-2010).
The concern to investors, in the long term, is the creation of positive cash flows. But
given that RIM has been going through a rapid growth and investment process, to date, it has
generated negative FCFF (Free Cash Flow For the Firm) and FCFE (Free Cash Flow to
Equity). The cash generated has been reinvested to maintain growth, and much of the cash
generated as it can be easily perceived in the excel sheet attached, also goes to an increase in
networking capital. However, there are differences in the cash flows to the firm and to the
equity holders. The cash to the firm represents in this case, the free cash flows from the
operations of RIM. While the cash flows to the investors are those that already take into
account financing expenses, such as net debt issued. Because the company has to be able to
meet its obligations to properly distribute dividends to investors. The cash flows to investors
have been more volatile, even though being very similar to FCFF. This possibly indicates a
more stable generation of cash from RIMs operations.
From this point, we know that the money generated from RIM's operations is reinvested in
2

All Calculations are shown in the Excel sheet attached at the end of the paper. The sheets are all based on
the ones supplied by the Teacher on the website

the company; to understand the dynamics of this investment we observe the ROIC, return on
invested capital. For RIM, it has been increasing slightly per year, but values are close to the
average of 21% of return on the capital invested. Also, after figuring out the average return on
the invested capital, it is relevant to infer how much of the generated capital is reinvested. If
the company has no other source of financing than equity and did not ever pay dividends, we
assume that the reinvestment rate is of 100% so far, and we believe that it will continue to be
so for the next few years. Given that the reinvestment rate is of 100% and the expected return
is of 21%, the expected growth equals the amount reinvested times the return for what was
invested. In this case: (1 0.21 = 0.21) or 21%.
In order to identify whether this is a good investment, we will be using the estimates
calculated above to compute the NPV of the company. We have estimated cash flows for the
period of the next five years, and assumed constant, but lower growth rate perpetuity for the
future. The lower rate for the perpetuity is of 6% which is significantly lower than the current
21%, but we stick to a more conservative forecast to avoid overvaluing the company.
Our results show a NPV of $ 26 Billion, meaning that it is surely a positive
investment for as long as the MV of Equity does not exceed $ 26 Billion. The Current MV
shows a MV of $ 32 Billion. Therefore we, currently, do not suggest an investment in RIMs
stocks.
V.

WACC

RIMs outstanding interest bearing debts

The total Book Value of debt usually represents the long-term debt of the company. For the
company we are analyzing, RIM, is equal to zero. Since our Book Value is equal to zero, our
Market Value is also equal to zero.
RIMs outstanding equity of the company
Book value of Equity = $1,057,610,000
Market Value of Equity = share price number of shares = $ 42.863 * 760,000,000
= $ 32,573,600,000
RIMs cost of debt

http://finance.yahoo.com/q?s=RIMM

Usually we should distinguish between the traded debt, graded non-traded debt and none
traded and none graded debt. However there is no debt in our company and is therefore
impossible to compute these three calculations.
RIMs cost of equity
In order to estimate RIMs cost of equity, we will be using the CAPM formula. For this we
will need several components; the risk free rate, the beta and the market risk premium.
Risk Free Rate (Rf)
The risk free rate we will be using in our CAPM computation is the 30 years U.S.
Government Bond. Rf = 4.50%
Beta Estimation ()
To estimate a companys beta, there are two ways to do so. Firstly is by running a regression.
The second one is based upon a comparable firm. We decided to estimate it in both way and
found the following results.
1. In order to find RIMs beta, one way to compute it is by running a regression.
Therefore, we decided to run a regression over the period of five years. By plotting
RIMs monthly data, we found that the beta of the company equals to 1.874.
2. In order to estimate the beta of the company based on comparable firms, we had to
examine the industry and find the most matching company. Since Motorolas shares
bare the same operational risk as of RIM, we chose this company as a comparison.
Both firms are at the forefront on the mobile handset competition and they both
support two out of the three mains mobile platforms; Android and Blackberry.
Motorolas levered beta = 1.655
The next step for us to do is to un-lever this beta according to Motorolas debt level.
Thereafter we should re-lever it according to RIMs debt level. As said in the previous
part, RIM has no debt. For that reason the re-levered beta will equal the unlevered
beta of Motorola. The formula we will be using is the following:
U = L/[1+(1-TR)*(D/E)]6
4

Excel regression function

5 http://www.google.com/finance?q=mot
6

TR = Tax Rate, D/E = Debt/Equity ratio

 Tax Rate = Income Taxes/Income before income taxes 7 = (677.00-271.00)/677.00 =

0.5977 60%
D/E = 20%8
Using all these components: U = 1.65/[1+(1-0.60)*(0.20)] =1.527777
According to the estimate of the beta using Motorola as a comparable firm, the beta is equal
to 1.527 1.53
Comparing the two beta estimates for RIM, the one based on Motorolas beta is a bit lower,
but if we consider that it is a newer company that still hasnt paid any dividends it should be
intrinsically riskier than Motorola. Therefore both of our estimates are assumed to be
coherent.
RIMs operations are mainly targeted towards a common goal. Therefore subdividing into
segments would be unnecessary.
Market Risk Premium (MRP)
In order to compute the market risk premium we need to find the expected market return
(Rm) and the risk free rate (Rf). The risk free rate was found in the previous section which is
equal to 4.50%. And we found that the Expected market return is equal to 6.23%. This
number is found by taking the historical market returns over the period of February 1971
November 2009.
MRP = Rm Rf = 6.23% - 4.50% = 1.73%
Cost of Equity (Re)
Re = Rf + (Rm-Rf)
Rf = 4.50%
MRP = 1.73%
= 1.87
Re = 4.50% + 1.87 (6.23% - 4.50%) = 7.74%

RIMs Weighted Average Cost of Capital (WACC)

7 This data is taken from Motorlas 2010 Financial Statement
8

http://financials.morningstar.com/ratios/r.html?t=MSI&region=USA&culture=en-US

WACC stands for the Weighted Average Cost of Capital. In order to compute the WACC
we use the following formula:
WACC = D/V Rd (1-TR) + E/V Re
Tax Rate TR: 0.5977 60%
Market Value of Equity E: $32,573,600,000
Cost of Debt Rd: 0
Since we assumed that RIM does not have any Long-term or Short-term debt, then
the cost of debt should equal to zero.
Cost of Equity Re: Re = 7.74%
WACC = 0 + 1 7.74% = 7.74%
Our WACC will be equal to the cost of equity = 7.74%
RIMs value of Equity per share
Equity Book Value / Number of Shares = $1,057,610,000 / 760,000,000 = 1.39
In the comparison of the market and book value of equity, we have encountered difficulties
because of differences in values. Thus, we tried to keep calculations the more coherent
possible.