BlackBerry Bulls, Just Stop

| About: BlackBerry Ltd. (BBRY)

You would think the drama would have finally come to an end. BlackBerry (NASDAQ:BBRY) has a tentative deal to go private, with major shareholder Prem Watsa and Fairfax Financial (OTCPK:FRFHF) taking the firm private for $9 per share.

It would seem to be an ignominious end for the company's run as a publicly traded company; BBRY trades more than 90 percent off its highs of just a few years ago, when the company was known as Research in Motion. And the low price, following BlackBerry's desperate attempt to sell itself and a disastrous second quarter earnings pre-announcement on Friday, would seem to finally convince BBRY bulls of their need to move on.

Amazingly, it hasn't. Commenters on this site, Twitter, and elsewhere continue to show the same optimism that has cost BBRY shareholders billions of dollars over the past couple of years, well after the company's struggles had become crystal clear and its downward spiral set in motion.

I won't call out anyone by name, as I do not intend to insult anyone personally. Nor do I take any pleasure from shareholders losing money, or nearly 10,000 BlackBerry employees losing their jobs, or the dedicated BlackBerry customer base losing their beloved products. (In the interest of full disclosure, I have not had any financial interest in the stock beyond compensation from this site for this and previous columns: I have never been long or short a single share of stock or owned any option position in BBRY/RIMM at any time.)

But several bullish themes were repeated in the wake of Monday's news that are simply repeats of the half-baked, overly optimistic pumping that has created losses for so many BBRY shareholders over the past few years. As such, I would like to address each one individually, in hopes that investors will not again repeat the mistakes so many have made with BBRY:

The buyout was manipulated; the board at BBRY issued the pre-announcement on Friday, tanking the stock so Watsa -- a 10 percent shareholder and long-time board member himself -- could take the company private at a cheaper price. Class-action suits should be filed, or the buyout squashed by regulators, so BBRY shareholders receive their due returns.

This theory is simply ludicrous. To begin with, BBRY's revenue for Q2, according to the pre-announcement, was almost 50 percent lower than the analyst consensus. Sales dropped nearly 45 percent year-over-year. Any board would pre-announce such a drastic miss, one that Nomura Securities said "might just be the worst miss that we have seen in 17 years of covering tech stocks."

More importantly, under the merger agreement, as BlackBerry itself noted in its press release, Watsa is entitled to six weeks to conduct due diligence of BlackBerry's books. Are BBRY bulls really arguing that if the BlackBerry board hadn't pre-announced the disastrous second quarter, that Watsa would instead have offered $12 per share on Monday, and then maintained that offer when the quarter was announced this coming Friday? That argument is simply preposterous. Were Watsa unaware of the train wreck that was Q2, he would have lowered his bid or simply walked away upon discovering it on Friday (with no penalty, I might add.) Furthermore, Watsa's financing is not yet arranged; the terms of debt or equity structures agreed to ahead of the Q2 report would be quickly changed by nervous financiers in the wake of a halving of revenue and a nearly billion-dollar net loss in a single quarter.

Again, Watsa has six weeks of due diligence to review the company; the bad news surrounding Q2 would have reached him sooner rather than later, and his offer price would have been adjusted. The problem is not the timeline of or the existence of the pre-announcement; the problem is that BlackBerry sales have collapsed, and it is losing money hand over fist. The alleged conspiracy does not exist; the alternative of not pre-announcing the massive second quarter loss would have been effective for exactly one week before Watsa -- and everyone else -- received the news, and the offer price either pulled or reduced to what it was on Monday.

The buyout is too cheap; BlackBerry has $2.6 billion in cash.

And a quarter ago, it had $3.1 billion, but it burned through nearly $1 per share over just the past three months. BlackBerry is hemorrhaging money right now. Shareholders expecting full value for the company's cash balance need to understand that the company is not being liquidated. That $2.6 billion is needed to cover the losses BlackBerry will post in the next few quarters, whether it is private or public; as such, buyers are not going to value that cash at 100 percent.

BlackBerry's various parts -- cash, patents, BBM, enterprise business -- have value to an acquirer.

Then why isn't the company selling them off itself? If a P-E firm can buy the company for $15, sell the patents for $3 per share, keep $5 per share in cash, sell the enterprise business to IBM (NYSE:IBM) or whoever for $5 and the handset business to Chinese PC maker Lenovo (OTCPK:LNVGY) for $3 and spin off BlackBerry Messenger to make a killing, why doesn't the company just do that itself?

Meanwhile, both Blackstone (NYSE:BX) and KKR (NYSE:KKR) were offered the company, and both passed, according to Bloomberg. What do BBRY bulls know that two of the world's premier private equity firms don't?

With the first bid now public, other bidders will come in.

BlackBerry announced a strategic review roughly six weeks ago, in which it basically put itself up for sale. Since then (and before then), rumored suitors have ranged from Lenovo to Apple (NASDAQ:AAPL) to a private equity consortium led by Watsa to a pure leveraged buyout by a more standard P-E firm.

So, the supposed second suitors have waited six weeks until BlackBerry posts one of the worst quarters in the history of tech stocks, and then accepted a disorganized, not-yet-financed, offer with hardly any premium to the stock's current trading price, and now they plan to jump in? Clearly, if there were substantial talks with other potential buyers, BlackBerry's board would consider holding out for a higher offer, or would at least wait for Watsa to have financing lined up before announcing the offer. Those potential buyers have had two years to make their interest known, and have had months to step in with an offer of $12 or $15 that the BlackBerry BoD would at least have to consider. What about recent events would cause them to step forward at this point?

At the end of the day, buyout rumors have swirled around the company since it was still known as RIM; any investor who bought shares on those hopes has done nothing but lose money, most recently in August when shares rose to $13.

In fact, the odds of the first bidder disappearing seem higher than a second bidder appearing on the scene. Again, Watsa's financing is not done -- Watsa himself appears to be posting nothing but his existing 9.9 percent stake -- and the Fairfax group has six weeks to analyze BBRY's financials, which will include the dreadful full earnings report on Friday. Analysts are skeptical not only of a second bidder, but of the deal going through at all.

One more note: Fairfax negotiated a breakup fee of 30 cents per share if BlackBerry secures a higher offer from another and 50 cents per share if that offer comes from Fairfax. So should another suitor trump Watsa with a $10 per share offer, BBRY shareholders will receive just $9.70 -- a 10 percent premium from Monday's close of $8.82. If Watsa's deal collapses, BBRY's downside is far steeper than 10 percent.

BlackBerry is worth more than $9 per share.

I would think Prem Watsa thinks so: that's precisely the point. Shareholders aren't going to get "full value" for BBRY, whatever they feel that is. A buyer wants to make money; whether the buyer is Watsa or anyone else, they are not going to pay full price. If they have to, they'll go elsewhere. I don't imagine anyone purchased BBRY shares -- or stock in any other company -- believing the stock to be fairly valued. The point is capital appreciation.

I don't want to vote for the merger and sell my shares.

It's ridiculous that CEO Thorsten Heins is getting $56 million for selling the company; it incentivizes him to do the deal at any price.

The Board of Directors is [rough euphemism for mistreating shareholders].

These all may be true. But these are among the risks of being a minority shareholder in a company. These are the risks of investing in a company whose previous co-CEOs saw their tenure end amidst tragically comic mismanagement, so much so that the company's market capitalization rose by nearly half a billion dollars upon the announcement of their departure. These are the risks of investing in a company whose current CEO drove the market cap back down over a billion dollars on the first day of his tenure. And these are the risks of investing in a company whose board of directors has seemed clueless, incompetent, and/or disinterested throughout the stock's long slide from triple digits to single digits.

The cheerleading for a buyout ignored all these risks, and one more: as I pointed out in comparing BlackBerry to Dell (NASDAQ:DELL) when BBRY reached $13 on takeover rumors in August, buyouts are not always good for individual shareholders. Dell shares have underperformed the market since the Michael Dell-led takeover was first announced in January; it will go private below its levels seen in March amid rumors of competing bids from Carl Icahn and the aforementioned Blackstone. And Dell is in far better shape than BlackBerry (for those who would argue against that assessment, Dell is solidly profitable, while BlackBerry is nowhere close.) As for BlackBerry, if you're upset that the board isn't looking out for individual shareholders, one question: why on Earth are you surprised?

BlackBerry makes great products; I really like my phone and it's way better than Apple.

Many bulls swear up and down that BlackBerry phones, particularly those released this year, are better than either Android models or iPhones, with some taking a swipe at Apple "fan boys" who ignore the superior BlackBerry product line. That may be true. But there is more to running a successful company than just engineering: there is marketing, and sales, and delivery, and meeting deadlines. BlackBerry has failed in all those categories.

Furthermore, what an investor likes does not, on its own, justify the bull case for a stock. Last week, I had a fried liverwurst sandwich and strawberry milk for lunch. That's not a reason to buy a butcher shop or a confectioner. (And, yes, I know BlackBerry phones are better than fried liverwurst. Everything is better than fried liverwurst. But you get my point.)

BlackBerry is a victim of a media conspiracy; smears about the company were 'leaked' to damage the share price and lower Watsa's buyout price.

Just like the first claim I referenced about Friday's pre-announcement, some bulls have decried media "leaks" about layoffs and the flood of negative media coverage.

Unfortunately for this theory, "leaks" in this case means company-written press releases and SEC filings. The media did not 'inflict' anything on BlackBerry: no amount of spin from the company could cover the damage that has been done to the company's business. BlackBerry's smartphone market share in the United States has gone from 42 percent to 3 percent in less than four years. At most US wireless providers, that is less than two upgrade cycles!

There is no sinister hand at work here; just a flailing company that, by any measure, has not succeeded. Revenues have collapsed; massive profits and cash flow have turned into billion-dollar losses and increasing cash burn. Simply put, BlackBerry has failed its shareholders.

And that is why the company is where it is: desperately putting out a "For Sale" sign and accepting an offer with essentially no premium, a substantial termination fee, and, at this moment, no financing. That is not the action of a company poised for a turnaround; it is not the action of a company that will entice multiple suitors into a bidding war that will drive up the share price. It is the action of a company looking to salvage whatever value it can from the assets -- tangible and intangible -- it has remaining.

At this point, optimism toward BBRY shares is trending dangerously close to delusion. There are no "white knights" coming on the horizon; there is no turnaround around the bend. The Fairfax bid is the best-case scenario. BlackBerry bulls arguing otherwise simply need to stop. It's enough. It's over.

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.