Lenovo, the Chinese technology giant, placed a huge and ultimately successful bet when it bought IBM’s personal-computer business eight years ago. Now Lenovo is contemplating an even riskier gamble: acquiring BlackBerry, the once mighty smartphone maker that has fallen on hard times.
Such a combination would reshuffle the mobile-phone landscape and potentially breath new life into the BlackBerry brand. But history shows that acquiring a struggling smartphone maker and then reviving it is excruciatingly difficult.
Just ask Hewlett-Packard, which paid $1.2 billion for Palm, the early smartphone maker, and then pulled the plug on it after only a year. Google is hoping to do far better with its $12.5 billion acquisition of Motorola Mobility, although a year later, the unit’s business is still in retreat.
Lenovo has signed a nondisclosure agreement so that it can examine BlackBerry’s books, the Wall Street Journal reported on Thursday, citing an unnamed source. Whether Lenovo will take the next step and make a bid is unclear.
BlackBerry’s board has already approved a preliminary $4.7 billion buyout offer by Fairfax Financial Holdings, a Canadian investment firm and one of BlackBerry’s largest shareholders. But others are also considering bids, including Cerberus Capital Management and BlackBerry’s co-founders, Mike Lazaridis and Douglas Fregin.
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BlackBerry is, of course, a shadow of its former self after executives underestimated the appeal of Apple’s iPhone and then failed to create a device compelling enough to compete. Customers are defecting at a rapid clip. In the most recent quarter, BlackBerry lost $1 billion, mostly from a write-down of inventory after its most recent line of smartphones flopped. The company plans to cut around 4,000 jobs, or 40% of its workforce.
Anyone considering a bid for BlackBerry would be wise to consider HP’s bungled acquisition of Palm two years ago. Inept leadership, shifting priorities and lack of enthusiasm by app developers led to its doom. HP tried to repurpose Palm’s mobile operating system, WebOS, for a new generation of mobile devices. But a year later, executives abruptly abandoned the effort amid disappointing sales and a corporate reorganization.
“We saw what happened with HP,” says Ross Rubin, an analyst with Reticle Research. “Those may have been extraordinary circumstances, but in the space of about six months, the plan to double down on Palm turned into a plan to shut it down.”
Google’s acquisition of Motorola Mobility last year is another case study. It shows that turnarounds in the mobile industry require time and deep pockets. Google said on Thursday that Motorola’s third-quarter revenue fell 33% to $1.18 billion from a year earlier while losses widened nearly 30% to $248 million. In a conference call with analysts, Google executives made clear that smartphones are a long-term bet for the company and that, in the meantime, they are willing to endure some pain.
On paper, at least, Lenovo would make a logical home for BlackBerry. Both companies focus on business customers and have close ties with corporate IT departments. Lenovo sells laptops, servers and computer accessories while BlackBerry makes smartphones for office workers. In corporate jargon, the companies share a number of “synergies.”
Additionally, Lenovo could use BlackBerry to enter the North American and European smartphone markets, using a brand name that still has some value. Currently, Lenovo sells smartphones only in the developing world. “What you get with BlackBerry is goodwill with a large number of IT organizations, primarily in the U.S. and the developed world,” says Chris Le Tocq, an analyst with Guernsey Research. “The brand has some value today, though a lot less than six months ago.”
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Whoever acquires BlackBerry will have to decide whether to continue using its proprietary smartphone operating system. Consumers and app developers have largely rejected it. Analysts suggested a switch to Google’s Android operating system, which already has a huge following. BlackBerry could build apps on top of Android so that users would still get easy access to BlackBerry’s e-mail and messaging services.
Regulators in Canada, where BlackBerry is based, and the U.S. are certain take a careful look at any acquisition by Lenovo. A number of U.S. and Canadian government agencies use BlackBerry devices, as do major corporations. Sending sensitive e-mails through a network owned by a Chinese company would likely raise red flags. Canadian regulators could always veto a proposed deal with an overseas company based on national-security concerns, which they did recently when an Egyptian company tried to buy a fiber-optic network in Manitoba.
Security wasn’t much of an issue when Lenovo paid $1.25 billion for IBM’s PC business in 2005, in what was then one of the biggest acquisitions of a Western business by a Chinese firm. But times have changed as Western countries and China increasingly face off over spying.
Despite the challenges, analysts held out hope for a BlackBerry revival under new ownership. But the company could also be carved into pieces and sold to different buyers. To minimize security concerns, BlackBerry could sell its e-mail network to a North American company, for example. An overseas company would then be free to pick up the handset business without much regulatory interference. Then there are BlackBerry’s patents, which could attract the interest of companies like Google and Microsoft. Patent ownership serves as a shield against lawsuits and ammunition to block rivals from using similar technology.
Given all the possibilities and the high stakes, why not kick BlackBerry’s tires?