Does BlackBerry's Good Technology Acquisition Make It A Buy?

BlackBerry Ltd (NASDAQ: BBRY) on Friday announced it had acquired Good Technology, a mobile security provider, for $425 million. The question investors are now asking is if the company's latest acquisition can boost the company's underlying fundamentals.

In a report published Monday, Morgan Stanley analyst James Faucette argued that BlackBerry's acquisition is "good" but "not great" as Good Technology has shown "very little" revenue growth momentum as of late and BlackBerry could have taken advantage of "better" acquisition opportunities.

Faucette said both BlackBerry and Good Technology offer a containerized MDM (mobile device management) that appeals to the highly-regulated enterprises (government, financials, legal) as they contemplate EMM (enterprise mobility management) options for multi-device environments. The analyst added that while both companies are "relatively strong" in its offerings, the mobile security market has "moved beyond the lock-it-down approach." In addition, both Microsoft Corporation (NASDAQ: MSFT) and VMware, Inc. (NYSE: VMW) have both become "increasingly" aggressive in the space with their "broader" enterprise software portfolio.

Acquisition Details

The $425 million acquisition cost represents a valuation of approximately 2.7x next-12 months revenue, Faucette stated.

According to BlackBerry's management, the deal will add $160 million in GAAP revenue within the first year, suggesting a roughly $40 million contribution towards management's fiscal 2016 software revenue target of $500 million. However, Faucette is projecting BlackBerry's fiscal 2016 software revenue estimate to be only $327 million and the company will need to continue acquiring assets to reach its target.

The analyst also noted that BlackBerry's stock is trading at approximately 1x fiscal 2016 revenue, implying the acquisition will be dilutive on a cash basis, though the company expects the deal to be earnings and cash flow accretive.

Bottom line, BlackBerry's balance sheet "flexibility" outweighs its poor business fundamentals for the time being. Nevertheless, the Good Technology transaction erases approximately $0.80 per share in cash in a transaction with "limited" growth potential.

Shares remain Equal-weight rated with an unchanged $7 price target.