On August 12, 2013, BlackBerry (BBRY) issued a statement indicating that it had formed a Special Committee to explore "strategic alternatives." BlackBerry defined these strategic alternatives as prospective partnerships, joint ventures, or an outright sale of the corporation. In conjunction with this press release, Prem Watsa, Fairfax Financial Chairman and CEO, announced that he would be stepping down from the board of directors, in order to avoid any potential conflict of interest.
Fairfax Financial owns 9.9% of BlackBerry, as the most powerful shareholder within the company. Against this backdrop, BlackBerry shareholders have been left to mull over a coincidental series of events that included rumormongering, earnings warnings and a resulting buyout offer out of Fairfax Financial. At this stage in the game, BlackBerry shareholders should forget about the past, cut their losses, and sell out now. Going forward, irate shareholders may file lawsuits that may not stand up in court. American savers demanding guarantees were always free to deposit money into FDIC-backed banking products.
BlackBerry Float and Volatility
On June 23, 2008, the then Research in Motion stock established an all-time high at $147.50 per share. At the time, Traders valued the company at nearly $85 billion, in terms of market capitalization. BlackBerry then controlled roughly 50% of the smartphone market. A 2008 photograph of candidate Barack Obama and his trusted BlackBerry handset captured the essence of this movement. BlackBerry built its reputation through its delivery of practical electrical engineering and security features. As such, BlackBerry emerged as a chic, yet serious brand for IT professionals, business executives, and political bureaucrats. Within a few short years, however, the Apple (AAPL) iPhone literally drove mobile leadership away from corporate culture and towards popular culture.
In response to the Apple Revolution, Research in Motion officially changed its name to BlackBerry and named R&B diva Alicia Keys as Creative Director. The shocking collapse of BlackBerry shareholder value may serve as evidence that all attempts out of this company to be hip have failed miserably. On September 6, 2012, BlackBerry ultimately broke down to a multi-year nadir at $6.33 per share. Over the past year, this stock has been whipsawed between a 52-week high at $18.32 and its $8 September 25, closing price.
At $8 per share, BlackBerry executives have now been left to manage a company carrying a mere $4.2 billion in market capitalization. Yes, roughly $80 billion worth of shareholder wealth has been destroyed over the course of five short years. According to Yahoo Finance, approximately 150 million out of 525 million BlackBerry shares outstanding were sold short, as of August 30, 2013. Main Street investors must realize that BlackBerry stock performance is highly susceptible to the whims of rumormongers and speculators, due to the minimal size of its trading float. Expect extreme volatility.
The Windows Nail in The Coffin
On September 3, 2013, Microsoft (MSFT) announced that it was set to acquire Nokia's (NOK) mobile device and services businesses for $7.2 billion, while continuing to license patent and mapping technologies from the Finnish corporation. This move serves as a bookend to the 2011 original partnership agreement between Microsoft and Nokia to build out a global Windows ecosystem. In 2012, Microsoft running partner Intel (INTC) also entered the mobile space, behind the launch of six separate smartphones powered by its mobile semiconductors.
Between 2011 and 2012, Intel aggressively increased research and development spending from $8.4 billion to $10.1 billion, despite the fact that net revenue had actually declined during this 24-month time frame. Going forward, Intel and Microsoft are likely to bring a combined $45 to $50 billion in annual cash flow from operations to the table. An August 7, 2013, data sheet out of research firm Gartner estimated that the Q2 2013 Western European consumer personal computer market collapsed by 25.8% sequentially, in terms of units sold. Most likely, the looming Windows 8.1 launch will not turn back the ongoing decline of the PC sector. Microsoft and Intel are therefore both armed with the means and the motives to establish Windows as a third wheel operating system, largely at the expense of BlackBerry.
Recent reports out of comScore and IDC have indicated that BlackBerry is a near non-factor within the mobile space. The Google (GOOG) Android - Apple iOS operating system duopoly has emerged to dominate mobile. According to comScore, Android and iOS operated a combined 91.9% share of calendar Q2 2013 U.S. smartphone subscriptions. During this latest quarter, the BlackBerry operating system actually lost ground (0.8% quarter-to-quarter market share decline) to this Google - Apple duopoly, and closed out the period clinging to a 4.4% share of the market. Meanwhile, IDC reported that the BlackBerry tablet operating system accounted for a mere 100,000 Q2 2013 shipments. The leading Android operating system powered 28.2 million tablet shipments during the same time frame.
The Bottom Line
On Friday, September 20, 2013, BlackBerry issued a warning statement to Wall Street. The statement projected net operating Q2 2014 losses of roughly $1 billion. The $1 billion in losses do include a mere $72 million in restructuring charges as an aside to massive Z10 handset inventory writedowns. The company expects to post these losses upon $1.6 billion in quarterly revenue. Going forward, BlackBerry cost cutting measures call for the termination of 4,500 employees, while also reducing the size of its smartphone portfolio from six to four devices. BlackBerry plans to offer two "high-end" handsets and two "entry-level" handsets. Wall Street clearly was not happy with this news, and traders immediately dumped stock to $8.73, for a 17% loss off the $10.50 opening price.
The following session, on Monday, September 23, 2013, arrived with a $9 per share offer out of Fairfax Financial to purchase BlackBerry. This offer effectively slapped a $4.7 billion price tag upon BlackBerry. Shareholders should sell out immediately, before this deal is derailed because of a lack of financing, in conjunction with shareholder activism. In theory, BlackBerry is barely worth zero, let alone $4.7 billion. Ironically, Prem Watsa and his Fairfax Financial are literally bidding against themselves to make an offer that other remaining misguided BlackBerry bulls cannot refuse. At this junction in time, Watsa's play for BlackBerry appears to be more so a matter of Canadian civic duty, than it is a matter of economics.
BlackBerry closed out its Q1 2014 books with $13 billion in assets above $3.7 billion in liabilities on the balance sheet. Be advised that the asset side of the ledger does include $6.8 billion worth of inventories, long-term investments, intangible assets, and property, plant, and equipment. Going forward, these line items will depreciate, as BlackBerry continues to post losses. Be advised that Fairfax Financial bankers will calculate that additional debt may force a private BlackBerry to dip into its current $2.8 billion in cash and short-term investment reserves, in order to meet future interest payments. BlackBerry added only $42 million to its cash position, after purchasing a net $91 million worth of short-term investments during Q1 2014.