BlackBerry (BBRY) stock established an all-time high at $147.50 in June 2008. At the time, this performance calculated out to roughly $85 billion in terms of market capitalization valuation. An iconic 2008 photograph of then Presidential candidate Barack Obama and his trusted BlackBerry captured the essence of this smart phone movement. BlackBerry built its reputation upon practical electrical engineering and security features. As such, 2008 BlackBerry was a go-to name for IT managers, business executives, and political bureaucrats. In retrospect, however, the 2007 launch of the Apple iPhone marked the beginning of the end of the BlackBerry regime.
On October 2, 2013, BlackBerry finished up the trading session at $7.96 per share, which does calculate out to $4.2 billion in market capitalization. Yes, misguided management decisions have helped to destroy $80 billion of shareholder wealth at BlackBerry within the past five years. In most scenarios, a rapid depreciation in shareholder value does correlate with increased incidents of activism. At the moment, Fairfax Financial Holdings and its recent $9 per share offer for BlackBerry has set an effective floor for shareholder activism. Going forward, prospective shareholder activists are faced with the daunting challenge of proving that BlackBerry stock is worth significantly more than $9 and the present sum of its parts. These activist people have no case.
The Chronology of Events
On August 12, 2013, BlackBerry issued a statement that its Board of Directors had created a Special Committee to evaluate strategic alternatives. BlackBerry then defined these strategic alternatives as prospective joint ventures, partnerships, or an outright sale of the company. Prem Watsa, Fairfax Financial CEO, also announced his decision to step down from the BlackBerry Board of Directors, as part of this strategic alternative statement. Fairfax Financial Holdings owned a then 9.9% stake of BlackBerry, as the telecommunication company's most powerful shareholder. Watsa resigned from the board in order to avoid any possible conflict of interest between management, private equity, and individual shareholders.
On September 20, 2013, BlackBerry announced preliminary results for the second quarter of its fiscal 2014. In effect, this statement degenerated into a shocking profit and revenue warning for Wall Street traders. Prior to the release of these preliminary results, financial analysts had been expecting Q2 2014 revenue of more than $3 billion out of BlackBerry. Instead, BlackBerry reported preliminary results anticipating roughly $1 billion in operating losses upon a mere $1.6 billion in Q2 2014 revenue. The quarterly losses were largely the result of $72 million pre-tax restructuring charges, on top of massive BlackBerry 10 handset inventory write-downs.
Wall Street was not happy with this news, and traders immediately dumped BlackBerry stock to $8.73 at the close of the Friday, September 20 session. This performance was a 17% loss in value off the opening $10.52 price. The following session, on Monday, September 23, Fairfax Financial was to announce its $9 per share takeover offer for BlackBerry. Contentious BlackBerry shareholder activists may highlight the actions of CEO Thorstein Heins and CFO Brian Bidulka recently authorizing the purchase of one $20 million jet, before dumping shares of their personal stock holdings hours prior to this latest earnings warning, as the breach of fiduciary responsibility. In response, BlackBerry has announced that it will sell off all aircraft, while also arguing that recent insider stock liquidations were part of automatic plans to raise cash and diversify personal portfolios. According to Reuters, "there was no indication of any wrongdoing by the executives or the company."
The Mobile Market
BlackBerry operated roughly half of the smart phone market during its 2008 apex of power. Today, the BlackBerry brand may be described as irrelevant, at best. On September 3, 2013, Microsoft (MSFT) agreed to purchase Nokia (NOK) handset and services businesses for $7.2 billion, while continuing to license patent and mapping technologies. Prior to this event, Microsoft running partner Intel (INTC) had increased research and development spending from $8.4 billion to $10.1 billion between 2011 and 2012, while revenue at the company actually declined during the period. Various communications out of Santa Clara have highlighted a renewed drive for Intel to establish itself as a real player within the mobile chip market. Most likely, these latest moves will establish Windows as the third wheel mobile operating system behind Google (GOOG) Android and Apple iOS, at the expense of BlackBerry sales.
On September 6, 2013, research firm comScore released its July 2013 U.S. smart phone subscriber market share report. The July 13 title was somewhat misleading, because the information actually presented averages spanning between the May 2013 and July 2013 quarter. Google Android and Apple iOS operated 51.8% and 40.4% of U.S. smart phone subscriptions, respectively. Taken together, the duopoly expanded its market share dominance by 1% during this latest quarter. Meanwhile, BlackBerry fought to hold on to a meager and shrinking 4.3% share of this smart phone market.
An August 5, 2013 report out of IDC paints an even gloomier picture, as far as BlackBerry investors are concerned. According to IDC, BlackBerry shipped a mere 100,000 units of its Playbook tablet during Q2 2013. For the sake of comparison, Google Android operated 28.2 million tablet shipments during this same time frame. Windows actually increased sales by 527% to 1.8 million shipment units and a 4% tablet market share. Microsoft and Intel have generated a combined $48 billion in average annual cash flow from operations, over the past three years, while the PC market continues to deteriorate. Microsoft and Intel obviously operate with the means and the motives to expand share and hasten the obsolescence of BlackBerry in mobile. This unwieldy turnaround project would repel activist investors who may otherwise wish to play hardball with the Canadian Prem Watsa in Ontario.
The Bottom Line
The aforementioned $9 per share offer out of Fairfax Financial does value BlackBerry at $4.7 billion, which is a near 12% premium above the current $7.96 share price and $4.2 billion market capitalization. Shareholder activists would be hard pressed to justify any price above $9 for BlackBerry.
On September 27, 2013, BlackBerry did release its Q2 2014 financial report for period ended August 31, 2013. The quarterly report did confirm that BlackBerry racked up $965 million in losses upon $1.6 billion in revenue. Perhaps most importantly, semi-annual cash flow from operations declined from $1.1 billion to $486 million between 2012 and 2013. For the six months ended August 31, 2013, BlackBerry burned through $368 million in cash, after actually netting $13 million between the proceeds and acquisitions of short-term investments. Certainly, prospective creditors of any buyout deal will rationalize that additional debt will force management to dip into the now $2.3 billion in cash and short term investment remaining on the balance sheet, in order to meet ongoing principal and interest obligations. As such, any proposed activist deal to block Fairfax and buy up BlackBerry stock may be stopped before it ever gets off the ground due to a lack of financing.
In theory, all assets that cannot be leveraged to turn a profit will depreciate towards zero in real terms. BlackBerry closed out its Q2 2014 books with $12.5 billion in assets above $4.1 billion in liabilities. The $834 million in deferred revenue will ultimately shift into net income. On paper, BlackBerry does offer more than $17 per share worth of net assets. Be advised, however, that the asset side of the ledger does list out $6.8 billion worth of inventories, long-term investments, intangible assets, and property, plant, and equipment. In all, this group may be subject to massive write-downs, if BlackBerry were to suffer through one more year of losses.
BlackBerry has already signaled its intent to terminate roughly 40% of its workforce, while also limiting its mobile lineup to four handsets, instead of six handsets. BlackBerry is effectively locked into a death spiral, where it lacks the capital for aggressive research and development and sales, marketing, and administration spending, which would be necessary to compete against the likes of Apple, Google, Samsung, and Microsoft. Alternatively, private equity buyers with the capital lack the technical sophistication to rehabilitate this felled star. The few remaining BlackBerry shareholder activists should therefore wave the white flag of surrender at Waterloo and sell off this stock.