Damodaran on RIM: Act Your Age!

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By HardCoreValue, he can also be followed on  twitter

Damodaran on RIM: Act Your Age!
Rim Co-CEO Jim Balsillie
Aswath Damodaran is a professor of finance and David Margolis teaching fellow at the Stern School of Business at New York University. He teaches the corporate finance and equity valuation courses in the MBA program. His research interests lie in valuation, portfolio management, and applied corporate finance.
His books are great and cover a huge variety of valuation techniques with lots of examples. Even better you can download videos of his finance classes. I went through them all one summer. They are excellently taught and surprisingly fun to watch. His blog deals with real world events and is always an interesting read.

His latest article displayed an interesting way of looking at RIM’s product and R&D problems, be sure to read the full article for the numbers but here is the gist of it.
“RIM has had a pretty good run as a company, but they have a problem. Their core technology which powers the Blackberry is a cash cow but it is one that faces corrosion in market share, as smart phone users turn to Androids and iPhones, with their more open operating systems and extensive app libraries. As the CEO of RIM, you have two choices.
  1. Go for growth: You can invest hefty portions of the cash flows from your core technology back into the business in R&D and new products, hoping for a breakthrough, but you are competing against two companies, Apple and Google, that have more resources and imagination than you do. You may be able to eke out growth but the amounts you would have to reinvest to generate that growth may make it a losing proposition for your stockholders.
  2. Go for cash: You can accept the reality that you have a product with a limited life but solid cash flows. You invest just enough to keep this product on its feet and a cash flow generator for the near future, and give up on new products and technologies.  You also change your capital structure and dividend policy to reflect your new status as a limited life, cash cow: use more debt in your financing and you return more of your cash to stockholders as dividends or stock buybacks. You are, in effect, liquidating yourself over time, and while your stock price will approach zero by the end of the Blackberry’s life, your investors would have collected enough cash flows not to care.

As a potential stockholder in RIM, here is my unsolicited advice to the management of the company. Rather than fight the critiques of your product (that it is closed, corporate and limited), embrace them. …
Disband your research and development teams, forget about product revamps and don’t even dream about more Playbooks. In effect, accept that you are an “old company” and behave like one. Your stockholders will be deeply grateful!?”

Read the full article on his blog

Damodaran on RIM: Act Your Age!

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