BlackBerry Ltd. (TSX:BB)(NASDAQ:BBRY) shares were up 4% in premarket trading on Friday morning after the company announced a US$425 million acquisition of closely held Good Technology. Interestingly, it’s the biggest acquisition in BlackBerry’s history.
So, why are investors reacting so positively to the acquisition? We take a look below.
The Good acquisition expands BlackBerry’s capabilities in Enterprise Mobility Management (EMM), which has become the area of focus under CEO John Chen. More specifically, it expands BlackBerry’s capabilities in managing competitors’ devices, such as iOS and Android-based phones.
BlackBerry also expects to generate revenue right away, and is estimating US$160 million in just the first year. Investors are understandably excited by such growth prospects.
Interestingly, BlackBerry and Good Technology have a history of sparring with each other. Good regularly talks down BlackBerry in sales presentations, while BlackBerry makes blog posts that feature marked-up versions of Good’s slides (which debunk Good’s claims).
Some big concerns
Investors shouldn’t get carried away. There are some big things to be worried about here.
First of all, the two companies have some overlapping offerings. Mr. Chen, of course, recognizes this, and plans to eventually combine them into one platform that customers can upgrade to.
Secondly, Good Technology has been losing money. This starts to make the purchase price—just under three times expected revenue—look a little bit expensive.
But the last issue is the most concerning, and it was raised by Morgan Stanley analyst James Faucette earlier this year. In a report from earlier in 2015, he said that BlackBerry will have trouble making its EMM revenue targets for this fiscal year, and the company may boost revenue through acquisitions in order to make up the shortfall.
So, when BlackBerry bought Good, one cannot help but think back to Mr. Faucette’s report. For the moment, this is only speculation, but it’s something that BlackBerry shareholders should keep in mind.
What does this all mean?
Before the acquisition, we knew that BlackBerry is shifting its focus to EMM, and that it faces an uphill battle. And that hasn’t changed with this announcement.
A more significant development will likely occur later this year. According to unnamed sources, BlackBerry is set to release an Android-based phone in November, just in time for the holiday shopping season. If that phone performs well, it will give a big boost not only to BlackBerry’s handset business, but its EMM offerings as well.
Until then, this development is really a “more of the same” story from BlackBerry.
This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.
Fool contributor Benjamin Sinclair has no position in any stocks mentioned.