BlackBerry (NASDAQ:BBRY) is eager to sell, although taking themselves out of the media after a sale does not offer their shareholders and employees the golden parachute their CEO will be rewarded with. Being purchased does not solve all of the company's problems, although there are certainly several outcomes for a post purchased BlackBerry. Moreover, there are various possible buyers for the company, each with their own merits. A buyout will certainly take the company out of the media's limelight and is the next projected event for the company, although they will likely remain in the public eye for the time being. This article will discuss the mechanics of who could be behind the next possible catalyst for the company -- a buyout.
1) Mike Lazaridis Takes BlackBerry Private
Mike Lazaridis is the co-founder and ex co-chief executive of BlackBerry who stepped down in 2011 along with his partner Jim Balsillie. He has reportedly approached Blackstone Group (NYSE:BX) and Carlyle Group (NASDAQ:CG) to discuss making an offer, although this is still preliminary. The two faced shareholder pressure as BlackBerry's market share was eroded to aggressive rivals including Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG). Mike Lazaridis has no reason to sell BlackBerry in parts and would likely drive to re-energize the company and continue selling devices. This is a tricky situation as BlackBerry's recent device sales have fallen short of expectations. In light of this, being out of the media's eye may be the best way to continue doing business.
Upon his departure, Lazaridis stated the following:
"In every successful company that's developed by founders, there comes a time when it enters a new phase of growth and it's time for the founders to pass the baton to new management."
Will the ex co-chief executive who was pushed out for BlackBerry's loss of market share going to be the one to reinvigorate the company? The infamous saying "this time is different" is usually something you hear before a bad set of events is about to unfold. Keep in mind the man has a large stake in the company, so he wants the best for the share price as well.
2) A Large Technology Company Buys BlackBerry
It is not hard to imagine a large technology company buying BlackBerry after Google's purchase of Motorola Mobility for $12.5 billion and the Nortel patent sale for $4.5 billion. If a technology company does buy BlackBerry they would likely phase out the company's devices in favor of their own. Moreover, there is no reason for the buyer to continue updating BlackBerry's software for devices that have already been purchased. The buyer in this instance already has their own products to continually update and upgrade.
In the event of such a purchase, BlackBerry's technology would have to be incorporated into the former's product line. Even if the buying company does decide to maintain the BB line, any worthwhile technology would undoubtedly be incorporated into the parent's set of products. The endgame here is simple and there is no reason to compete with yourself. If your using the technology in your main devices anyway there is no reason to maintain a product line whose key features would only be used to bolster the main product line.
Building upon this idea, Tim Cook has stated that fragmentation in the Android line is a compounding problem. This eludes more to the number of Android producing companies than any one company's individual product line. Although for a company to avoid a fragmented product lineup, they would have to put all of their resources into their key devices. Thus foregoing the BlackBerry line in favor of their own devices, while incorporating BB's features and technology -- such as BBM and BlackBerry's security that led to the granting of their Authority to Operate on U.S. Department of Defense networks into their own devices.
This incorporation process is not instantaneous and could be worth it in the long run as the buyer's competitors would not have BlackBerry's technology. Let us keep in mind some food for thought before we go on: is it worth incorporation, or is it only worthwhile to BlackBerry's products?
If purchased by a technology company, I see the company's products being phased out in favor of the buyer's devices. Moreover their technology would have to be deemed valuable enough to warrant incorporation into the buyer's devices. Apple, Samsung (OTC:SSNLF) and Google are successful with their own product lines and Microsoft (NASDAQ:MSFT) has already purchased Nokia (NYSE:NOK), so there does not seem to be too many possible buyers. These companies have benefited from the demise of BlackBerry -- BB's loss of marketshare was to the gain of others. So why would they want to purchase their competitor that they were already successful in out innovating?
3) Sold For Parts or Prem Watsa (Fairfax) Buying BlackBerry
Two areas that are touchy subject for investors is the company being sold off in parts. I see it as unlikely for a large technology company to purchase BlackBerry just to sell them, as they have better uses for their money to advance their product lines.
Ruling out a large technology company purchasing the company to sell it off, another option is available: a private equity firm either buying and selling the company, or keeping it. The former could benefit from BlackBerry's technology and patent portfolio (worth at least $2.5 billion), although the private equity firm (with intentions to re-sell) would have to deal with various implications from their purchase. The winding down of underperforming business segments including handsets for $800 million and costs to restructure could deter a purchase by a private equity firm. The firm would look to shut down any unprofitable segments to avoid costs involved with maintaining them as they look to sell the segments. While if the firm decides to keep the company whole, they would not have to incur these costs.
BlackBerry has a chance to make part of their $1 billion dollar Z10 write down back with the proliferation of the Z30. With a lower price point and emerging markets as their target, the Z10 has a chance to make some money back. For argument's sake, let's imagine that the Z10 makes $250 million back and BlackBerry breaks even on the Z30. A private equity firm would still have to deem the company worthwhile for purchase. A purchase that would include BlackBerry's services business worth around $3 billion, their $2.8 billion in cash and around $2.5 billion in patents. My rough estimate places the value of these three items with the cost of a handset phase out is around $7.5 billion. This translates into a 67% premium to the current market cap, not including cash burn and any other costs with restructuring. Some of these extra costs could be covered through profit on the Z10 (whether through BlackBerry or later on under a new owner) with a new price point, for arguments sake. As long as it is a quick transaction and cash burn does not erode the balance sheet.
There is value in the company's parts and Fairfax Financial is the most likely buyer in this instance. Fairfax already owns 10% of BlackBerry's shares and if they bought BB, they would also have the company's cash.
At my rough estimate of $7.5 billion or $14.51 per share, Fairfax would have to purchase 90% of the company's shares. This would cost $6.75 billion minus BlackBerry's 2.8 billion in cash resulting in a retroactive price around $4 billion. If sold for the current market cap price of $4.5 billion to Fairfax, minus cash, it would cost around $1.25 billion. This accounts for buying 90% of the company's shares and excludes restructuring costs and the cost to wind down the handset division. (The handset division wind down has been excluded since if FairFax bought the company they would likely continue its operations. Also, they would own BB and would control their cash. Moreover, it is cash they would not have to obtain for BB)
Keep in mind that a sale price at the current market cap it unlikely, and some are calling for an $8-10 billion price tag. This is just below the $7.5 billion I used in my analysis. Fairfax Financial Holdings (OTCQB:FRFHF) has around $7 billion in cash, whether or not they want to use part or all of it is up to Fairfax and Prem Watsa.
Moreover, Prem Watsa is known for his purchases around the current price of BlackBerry.
"Roughly half of Watsa's BBRY purchases were made at "going out of business" prices in the $7.00-$8.00 dollar per share range ..."
It my personal opinion that a buyout from a large technology company is unlikely. Most have already innovated past BlackBerry, to the latter's loss of market share, and would have to maintain or incorporate BlackBerry's product line into their own. A buyout by a private equity firm seems most likely and favorable for BlackBerry. Prem Watsa through Fairfax seems like the most probable buyer for the company. Mike Lazaridis was pushed out for the loss of BlackBerry's market share, what makes this time any different? Whether or not Mike Lazaridis will or will not re-energize the company is unknown, but this does not deter his chance at buying the company. That simply comes down to a price tag, although many would like to see the core business succeed.
A bidding war between Lazaridis and Watsa could be interesting and rewarding for the current shareholders if it were to occur. It would also help the both of them since they are large shareholders too. Moreover, either one would likely keep BlackBerry in business which is good for the brand and their remaining employees. Although, Prem Watsa would likely be more successful with the future of the business since Mike Lazaridis was shown the door in the past.
A buyout simply to sell the company in parts is the outlier, less likely than a tech buyout or a purchase by Lazaridis or Watsa. My personal opinion holds the "Canadian Warren Buffet" Prem Watsa as the most probable buyer, with a price tag around $7.5 billion. Whether or not Prem Watsa would run the company or shift management around is yet to be disclosed -- if he buys the company. It would certainly ring a bell of the time Warren Buffett invested $700 million in Salomon and ended up being chairman of the firm. Keep in mind Buffett walked away with $1.7 billion.
Keep in mind that shorts will pound the share price moving forward. This is because troubling times are still enveloping the company (i.e. lackluster sales and BBM being pulled from iPhone and Android, if confirmed). Moreover, the only real catalyst in sight is a buyout that can offer some form as solace as the only catalyst in sight.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article. Always contact your financial professional before executing any trades. This article is meant to be informational and is in my own opinion.