RIM has been in the news a lot lately with the hiring of their new CEO. I dug up Aswath Damodaran’s article from over a month ago about what he thinks RIM should do (he’s a Finance Professor from Stern School of Business). It’s especially applicable when considering Apple’s awesome quarter and Monday’s news that the new RIM CEO plans to “stay the course” (met by an over 8% drop in stock price to close at $15.56).
Damodaran breaks down RIM’s options in detail and appears to advocate the exact opposite of what the CEO is doing. He feels that the valuation is higher if the company takes the cash and starts winding down the operation.
… 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!
If you want to argue with Damodaran, which I’m not advocating, read his supporting argument first. He breaks down the numbers and even offers a spreadsheet if you want to do a little more analysis. He’s got a five year plan where he expects RIM to effectively shut down their operations, losing 20% market share each year.
It’s a great thought experiment. Damodaran suggests that the market is already pricing in the growth strategy with a lower stock price than the liquidation scenario. The drop in stock price with the “stay the course” message seems to corroborate Damodaran’s assertions. Is it too early to tell? Or, as Damodaran seems to say, have the Apple and Google juggernauts already dug RIM’s grave.
This has piqued my interest. I’m going to pay closer attention to this and check back to see how his assumptions fared. This highlights the academic versus the practical. Even if the liquidation scenario were more valuable, the chances of a CEO having the guts to follow it through are slim.
The finance person can really have an impact here as an impartial advisor and we can learn a lot from Damodaran’s approach. Damodaran has laid out the assumptions and done the math. What if you, as a finance person, brought some hard to swallow data like this to your CEO and strategy group for consideration? Would they review it earnestly, bat around the assumptions, and treat is as a viable alternative? Or would they kick you out of the office and have you add some stretch targets to the five year plan?
I strongly suggest reading Damodaran’s blog. He writes in simple, non-academic language and gives the intellectual and financial take on many news items. It’s always refreshing stuff.