How BlackBerry buyout could bear fruit

The man billed as Canada's answer to Warren Buffet is preparing to take a gamble on technology industry basket case

BlackBerry is changing fast: not so long ago, it was a go-go smartphone firm with two bosses and two private jets. Now, following the collapse in sales, there is just one boss and this week it emerged that his (new and bigger) jet will soon be sold. Further down the food chain, however, the changes have been more painful. Come next summer, the firm will employ 9,500 fewer full-time staff than it did in 2012.

But by then, Canada's biggest technology group may no longer exist in its current form. Prem Watsa, the hedge fund boss with an appetite for distressed assets, is ready to spend $4.7bn taking BlackBerry private. The man billed as Canada's answer to Warren Buffet is preparing to take a gamble on the technology industry's biggest basket case.

Opinion is divided on whether Watsa's hedge fund and insurance group, Fairfax, will actually succeed in raising the required funds. But if BlackBerry is privately acquired, there are those who believe the time has come for it to stop making its email phones completely, and focus instead on less competitive fields.

"It is very difficult to see how BlackBerry's devices business is sustainable in the long term," says Ben Wood, chief of research at CCS Insight. "A BlackBerry is a phenomenal phone for email but the world has moved around them."

In the last quarter, it has been marketing improved phones. But it has been aiming at a largely uninterested public and the effort put a $500m dent in BlackBerry's kitty. It now has cash reserves of just $2.6bn to see it through the tough times ahead, which at the current rate of spending will not last long.

"We estimate that without another major round of layoffs, BlackBerry may run out of cash in 12 to 24 months," Mark Sue, an analyst at RBC Capital Markets, predicted. He warned up to 3,000 more jobs may need to go "to right-size the organisation".

If Watsa's offer materialises, investors are being urged to accept it. "It's still a long shot that new owners can turn the company around," said Kris Thompson at National Bank in Montreal. "Shareholders should take the money and run."

Apple and Samsung are too far ahead. Nokia is bailing, selling its phones arm to Microsoft. Sony is still trying, with some success, to kindle interest in its handsets. But these are all multinationals whose activities range from making fridges and televisions (Samsung) to Hollywood studios (Sony), to one of the biggest digital shopfronts for music and TV series (Apple's iTunes).

Like the troubled Taiwanese specialist HTC, BlackBerry no longer has the cash needed to give it a fighting chance in the smartphone world war. But if it pulls out, there are at least three other ways it could generate value.

The most achievable, if least exciting, would be selling and managing secure mobile phone servers to companies and government agencies. The new generation of BB10 servers can be used to send encrypted emails, over BlackBerry's own secure network, to a whole range of phones including Apple and Android devices. In a world where many people now use their personal phones for work, these servers solve a headache.

Microsoft is pushing into this space, and IBM, alongside smaller groups like Citrix, but BlackBerry has a head start. It claims 90% of America's top 500 companies already use its technology, and 25,000 customers are currently on its new generation enterprise servers.

Watsa has not set out his plans in detail, but on Monday night he indicated the firm's future lay with business customers, saying the focus would be "on delivering superior and secure enterprise solutions to BlackBerry customers around the world."

If Fairfax decides to close the handset business, it could afford to auction much of BlackBerry's intellectual property, most recently valued in company accounts at $3.4bn. The true worth is disputed, with Bernstein Research putting the total at between $800m and $1.5bn, with a discount for redundant 2G technologies.

But there is value in the inventions of BlackBerry's founder, Mike Lazaridis, and the portfolio was boosted in 2011 when BlackBerry joined a consortium to buy up patents once owned by telecoms equipment firm Nortel. It spent $775m picking the bones of the last big Canadian technology group to fall on hard times.

Then there is BlackBerry's Messenger service, to which an estimated 60 million active users devote an average of 90 minutes a day. Their numbers may be thinning, but those who remain make full use of the grapevine that was once so dominant that politicians blamed it for sparking the London riots. BBM carries 10 billion messages each day.

WhatsApp, which offers a similar free service via a smartphone application, has 300m active users, and is considered a likely candidate for an Instagram-style billion dollar takeover. BBM could be worth a similar sum if spun off to shareholders or sold.

"This is a break up story," says Benedict Evans, mobile expert at Enders Analysis. "There is nothing a new owner is going to do to make people start buying BB10 devices in enough volume to be viable. They should have built on top of Android two years ago."

BB10 was in fact built on QNX, software produced by a company BlackBerry acquired for the purpose. Some say its future lies with QNX. The technology is already used in cars, medical machinery and even military drones and air traffic control towers. BlackBerry may no longer be able to afford the company jet, and its future in mobile phones hangs in the balance, but it could live on in the skies.

• This article was amended on Wednesday 25 September 2013 to make it clear that HTC is Taiwanese not South Korean.

Article Source : http://www.guardian.co.uk

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BlackBerry aims to go private in $4.7bn deal with Fairfax Financial group

Troubled smartphone maker, whose shares have plummeted in recent times, ready to be sold to Canadian buyer for $9 a share

BlackBerry, the once-dominant maker of smartphones that fell on hard times in recent years, has found a suitor willing to pay $4.7bn for the troubled company.

Fairfax Financial, a Canadian firm that already owns 10% of BlackBerry, has agreed to join forced with an unnamed consortium of other buyers to acquire the company for $9 a share.

The move would take BlackBerry private, removing it from a public listing on Nasdaq, where stocks have fallen from a high of $148 in June 2008 and now languish at about $8 a share. On the announcement, BlackBerry stock rose a modest 2% to $8.85 a share, giving the company a market value of $4.65bn.

The deal is not done, however. First, Fairfax will spend two months vetting the company's financial statements. That due diligence is expected to be complete by 4 November, BlackBerry said in a statement.

BlackBerry said it could take a better offer if another buyer appears.

The agreement, which halted BlackBerry's stock on the Nasdaq at $8.23 a share in midday trading, is only a letter of intent, which is a step below a full merger agreement. Fairfax is still "seeking financing from BoA Merrill Lynch and BMO Capital Markets," BlackBerry said, indicating that any deal is in its very early stages.

Analysts have been skeptical about BlackBerry's efforts to turn itself around, and several of them released a batch of downbeat assessments before the sale announcement.

BlackBerry announced last week that it would miss revenue estimates by a large amount, warning Wall Street that it would only record revenues of $1.6bn instead of the $3.1bn expected by analysts. The company also said it would write off about $1bn due to excess inventory of the BlackBerry 10, which suffered disappointing sales.

That announcement was greeted as calamitous by analysts, including Nomura's Stuart Jeffrey, who wrote to clients about BlackBerry's sharply shrinking revenue: "This might just be the worst miss that we have seen in 17 years of covering tech stocks."

In an effort to cut costs, BlackBerry also plans to lay off 4,500 employees.

RBC Capital Markets analyst Mark Sue told investors on Monday morning that BlackBerry "may run out of cash in 12–24 months" if it did not go through another round of layoffs. Sue said BlackBerry burned cash fast and that its patents are declining in value, as rivals slow down their interest in buying companies purely for intellectual property.

Jeffrey listed the litany of BlackBerry's ills in a note to clients last week, and particularly noted BlackBerry's difficulties in finding a suitor.

"Management has announced more headcount cuts, a further slimming down of the handset portfolio, and an exit from the consumer market. Many IT departments have started looking at BlackBerry alternatives," Jeffrey wrote in a short but critical research note.

"The board still has no update on its search for strategic alternatives. In the absence of an announcement on strategic options by the board, management can only try to manage the pace of declines."

Michael Genovese, of MKM Partners, estimated that BlackBerry's real value is only $7 a share. Of that, the company's services division is worth $5 a share, Genovese estimated, while the operating system is $1 and the intellectual property is worth another $1 a share.

"We expect BlackBerry will soon go away as a handset brand and likely as a smartphone operating system too. The brand may only remain as part of the standalone BlackBerry Messenger application before long," Genovese wrote before the deal was announced.

It's not clear whether the Fairfax agreement will be enough to answer BlackBerry's critics about the future of the company. While it shows that BlackBerry has done the work to attract a buyer – which not many analysts believed it could – the agreement is so soft that it may not provide the certainty that the market wants.

It may instead serve as a lure to other buyers, putting what Wall Street calls "a floor" on the company's value, and, in essence, starting a bidding process.

Fairfax Financial, headed by Prem Watsa, is a life insurance and investment management company based in Toronto.

Article Source : http://www.guardian.co.uk

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Autumn brings a chill for BlackBerry

Bleak results, rushed out early, and another huge round of layoffs signal that the mobile pioneer's time is running out

With the fall of Nokia looming over him, this weekend will be an uncomfortable one for Thorsten Heins, chief executive of BlackBerry. While the Finnish firm sold its mobile phone business to Microsoft for €5.4bn (£4.5bn) this month, questions are swirling as to how long BlackBerry – which signalled its distress in August by putting itself up for sale – can survive, and in what form.

Things are so bad that on Friday night, market rumours forced Heins to announce the top-line quarterly results a week early. And they are grim: an operating loss of up to $995m (£620m), including $960m of inventory writedowns on its new Z10 handsets released in January, a net loss of more than $250m, revenues half what analysts expected at $1.6bn, and phone shipments of 3.7m – which Apple will comfortably exceed with its new iPhones this weekend alone.

For a company that once dismissed the iPhone for having no keyboard (a key selling point for BlackBerry phones), it's a humiliation. The low shipment figure exposes Heins's claim in April that the new Q10 phone – the first keyboard-equipped model using its new BB10 software – would sell "tens of millions". It might have sold a million.

Now the question is turning to how long BlackBerry has to go. On Friday, the company said it will cut 4,500 jobs, roughly 40% of its 11,000 total worldwide, adding to 7,000 jobs cut in the two previous financial years. It will reduce its future phone portfolio from six to four.

One former insider asks: "How would BlackBerry win? There's no answer to that at the moment. A buyer? I don't see how they would make the case."

This weekend was meant to be a new start for the company, with an attempt to turn back the clock to when it was the star of the tech world by offering its famous BlackBerry Messenger (BBM) software free for iPhones and Android phones. But rivals such as WhatsApp are already on both, with more users, while BlackBerry's base is dwindling both among consumers and businesses. BBM's arrival on the other platforms is two years too late, says the insider.

Friday's bad news drove the stock down by 20%, to a market cap of just $4.5bn. Broken up, BlackBerry might be worth more: last quarter, it valued its patent portfolio at $3bn, and says it has $2.6bn of cash and no debt. The services business has around 35m business customers, who could fetch up to $4.5bn.

But who would buy it now? Silver Lake, the private equity company that facilitated the recent $24.8bn buyout of Dell, appears uninterested – and Michael Dell has said his company won't go back into smartphones. Reuters reported last week that while Canada's Fairfax Financial Holdings, a 10% shareholder, might try to stage a buyout, interest from other private equity players is muted.

So where did BlackBerry go wrong? Was it the PlayBook tablet, unveiled 18 months after Apple's iPad in September 2011 with the slogan "Amateur Hour Is Over"? That has devoured $750m in write-offs, but the insider says its software was essentially that used in BB10. So, costs aside, it wasn't a distraction.

Instead, Mike Lazaridis, who devised the first BlackBerrys, and Jim Balsillie, who ran the company with him, failed to grasp how quickly the change ushered in by the first iPhone in 2007 would overwhelm the smartphone industry. According to the former insider, BlackBerry underestimated the speed at which businesses would start letting staff connect their own smartphones to company servers for email and more. "BlackBerry didn't move fast enough on that, nor get BBM out soon enough," the insider says.

The key failing was that BB10 was two years too late. Lazaridis and Balsillie saw that BB7, which powers older BlackBerrys, was outdated, but the new version was not released until January this year.

Heins was installed in January 2012 after the board ejected the two founders, but he does not escape criticism either. He was the chief operating officer and so "had the reins of the smartphone business", says the insider. That means the delay in releasing BB10 can be laid in part at Heins's door.

Yet if BB10 had taken off, it would have cut the company's throat. That's because phones using that software don't generate any service revenues from sending emails, data and web pages – which amounts to between a fifth and third of revenues, and rather more of profits.

All eyes are on BlackBerry now. But the message is not a positive one. The turmoil in the smartphone industry is brutal; more casualties may follow.

Article Source : http://www.guardian.co.uk

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