BlackBerry Down But Not Out
BlackBerry Limited (BBRY) has been in shambles for some time now. The reason: they jumped too late on the consumer-oriented smartphone bandwagon. The smartphone revolution was started by the iPhone, and it was successful precisely because it was easier to use, and was not focused towards corporate professionals only.
Amusingly, when the first iPhone was launched in 2007, Jim Balsillie, the CEO of BlackBerry back then, commented that the iPhone is “kind of one more entrant into an already very busy space with lots of choice for consumers … But in terms of a sort of a sea-change for BlackBerry, I would think that’s overstating it.”1 If only Balsillie knew that the iPhone would soon be hailed as revolutionary, and that BlackBerry would suffer financial losses, leading to an eventual buyout at a depressed valuation. BlackBerry’s stock price trend shows how the company, once renowned for its smartphones, has slipped almost into oblivion. From a peak of $144.45 on 18th July 2008, the company is currently trading below $10.
Recently, BlackBerry announced its second quarter (2Q14) earnings on 27th September. The numbers were bleak; revenue was down 45% year over year and the company incurred losses of $965 million, mainly due to inventory charges of $943 million for the BlackBerry Z10.
lackBerry, in its strategic meeting in August 2013, considered the possibilities of a joint venture, partnership or sale of a company. Since then, some buyers have shown interest but the overall response has been a bit lukewarm. Most potential buyers are interested in parts of the business instead of the whole company, since its hardware unit is almost worthless and bidders are mainly interested in the company’s patents and services only. Private equity firms have been relatively more interested in buying a distressed company like BlackBerry, with an aim of turning it around.
Recently, Dell has struck a deal to go private in order to fix inefficiencies for a turnaround, after it missed the tablet and smartphone bandwagon.
BlackBerry signed a letter of intent with Fairfax Financial Holdings Limited (FFH), an Ontario based holding company involved in life insurance and reinsurance, and investment management, to take BlackBerry private in a deal worth $4.7 billion. The deal, led by the Fairfax consortium, would result in Blackberry shareholders receiving $9/share and is expected to be finalized after six weeks of due diligence, ending on November 4th. A part of the due diligence clause stipulates that BlackBerry will be charged $150 million if it sells itself to any other party before November 4th. BlackBerry’s agreement to such terms shows its urgency to find a buyer, as it bleeds cash and earnings continue to fall. The deal with Fairfax will allow BlackBerry to reach to a strategic alternative decision sooner and attract more offers from other buyers before its value falls even more.
Cerberus Capital Management, L.P. has also shown a keen interest in acquiring BlackBerry. It plans to sign a confidentiality agreement to evaluate its books. If BlackBerry and Cerberus strike up a deal, we believe it won’t be higher than $9/share, considering the deteriorating health of BlackBerry.
The Fairfax deal is set to be finalized by 4th November 2013, but the future of BlackBerry is far from certain. It seems that tech companies who have lost their consumer base due to changing industry dynamics are reluctant to pursue a buyout probably because of lost self-confidence or inability to innovate enough.
The only hope for BlackBerry is its BlackBerry Enterprise Server (BES). Fairfax CEO Prem Watsa has said that after BlackBerry goes private, it will focus on enterprise customers only. Luckily, its enterprise server is well reputed, and BlackBerry could become what it once used to be; a company which focuses on enterprise solutions only, and delivers high value to shareholders through the enhanced security of its enterprise network. Its handset business is waning and providing services to existing smartphone makers seems to be the wise option.