On October 29, 2013, The Wall Street Journal reported that BlackBerry (NASDAQ:BBRY) executives flew to Facebook (NASDAQ:FB) offices in California the week prior to pitch their telecommunications company for sale. Immediately upon the news, BlackBerry stock tacked on modest 1.4% gains to close out the October 29 trading session at $8.32 per share. In addition to Fairfax Financial, Facebook was to then join a speculative shotgun merger list that included the likes of IBM (NYSE:IBM), Google (NASDAQ:GOOG), Apple (NASDAQ:AAPL), Cerberus Capital Management, and even BlackBerry founder Mike Lazaridis. Facebook, of course, is most likely to bat down this latest BlackBerry proposal with the general "let's just be friends" speech. BlackBerry shareholders, unfortunately, have long grown accustomed to rejection and humiliation.
Facebook Business Model
Facebook is the epitome of Web 2.0. At its core, Facebook is simply a website that sells advertising revenue. Advertising revenue will obviously increase, if Facebook can attract more traffic to the website, and engage visitors while they do visit the platform. To do so, Facebook has established itself as the premier space for social networking on the Internet. Facebook is now a focal point for gaming, dating, business marketing, political movements, and file sharing. In a recent address to shareholders, Mark Zuckerberg, Facebook founder and CEO, proclaimed a mission statement to "connect the world."
On October 30, 2013, Facebook presented results for their fiscal third quarter, which ended September 30, 2013. Facebook generated $425 million in net income upon $2 billion in Q3 2013 revenue. Facebook has banked $977 million in net income upon $5.3 billion in revenue through the first nine months of 2013. Facebook also closed out its Q3 2013 books with $9.3 billion in cash and marketable securities above a mere $1.9 billion in liabilities. This Web 2.0 stock also traded near $50 throughout the month of October, which did calculate out to more than $120 billion in market capitalization. On paper, Facebook does carry the financial means to make a play for BlackBerry.
Facebook financial results arrived largely courtesy of its listed September 2013 average of 728 million daily active users (DAUs) and 1.19 billion monthly active users (MAUs). Facebook usage, of course, reflects Moore's Law and the secular consumption shift out of personal computers and towards mobile devices. On a year-over-year basis, the mobile monthly active user count increased by 45%. In all, year-over-year MAU statistics increased by 18%. Going forward, Facebook business performance will be largely dependent upon the abilities of original equipment manufacturers, such as Apple and Samsung (OTC:SSNLF), to integrate social media applications that help deliver advertising revenue. Last year, Mark Zuckerberg introduced his company as a "mobile company," before also declaring that a Facebook phone has "always been the wrong strategy."
The Mobile Market
On October 4, 2013, research firm comScore released estimates for August 2013 U.S. smartphone subscriber market share. The data actually presented averages of statistics taken through the June 2013 to August 2013 calendar quarter. A quick review of the comScore report would confirm the "winner take all" nature of the technology market. Taken together, Google Android (51.6% market share) and Apple iOS (40.7% market share) systems operated a combined 92.3% share of the U.S. smart phone market through the 2013 summer months. BlackBerry actually lost 0.8% U.S. smartphone subscriber share during this same time frame - to close out the August 2013 quarter holding on to a dwindling 4.0% stake of this marketplace. From a mere marketing standpoint, Facebook lacks the financial resources to define BlackBerry as a legitimate competitor to Apple, Google, and Samsung within the smartphone space. Apple has spent more than $10 billion strictly upon selling, general, and administrative expenses during each of its past two fiscal years. At best, Facebook will finish out its 2013 fiscal year with $7.5 billion in total net sales on the books.
BlackBerry has fared even worse within the tablet market. Research firm IDC associated BlackBerry operating systems with a mere 100,000 in tablet unit shipments through the second calendar quarter 2013. For the sake of comparison, Android and iOS operating systems accounted for 28.2 million and 14.6 million in Q2 2013 tablet unit shipments, respectively. Most recently, on October 30, 2013, IDC issued Q3 2013 tablet shipment estimates, according to vendor classifications. BlackBerry, of course, did not break into the top-five vendor list, which did include Apple, Samsung, Asus (OTC:AKCPF), Lenovo (OTCPK:LNVGF), and Acer (OTC:ACEIY). As a tablet vendor, fifth-place Acer shipped 1.2 million units through the third calendar quarter of 2013, which was a 2.5% share of the market. By many accounts, the BlackBerry operating system and associated Playbook may be dismissed as total non-factors within the tablet market. Again, Facebook would lack the resources to build out a tablet platform, in the aftermath of any BlackBerry acquisition.
On September 3, 2013, Microsoft (NASDAQ:MSFT) announced that it was set to acquire Nokia (NYSE:NOK) device and service businesses for $7.2 billion, while continuing to license patent and mapping technologies from the Finnish firm. This move landed the proverbial deathblow upon BlackBerry within the mobile space. On average, Microsoft has generated $29 billion in annual cash flow from operations over the past three years. The buyout of Nokia, again, arrived against the backdrop of a secular shift of consumer dollars out of personal computers and towards mobile devices. Going forward, Microsoft would operate with both the means and the motives to establish Windows as a real alternative to the iOS - Android duopoly, at the expense of BlackBerry. Recent reports have already indicated that Windows systems operate a 10% share of European smartphones. Certainly, Facebook would be loath to compete against Microsoft, as an original equipment manufacturer.
The Bottom Line
On September 23, 2013, BlackBerry and a consortium led by Fairfax Financial entered into a letter of intent. The letter of intent granted Fairfax Financial six additional weeks to perform due diligence and line up financing, before officially putting the arrangement up for shareholder vote and closing out the deal. At the time, Fairfax Financial already owned roughly 10% of BlackBerry, and was offering $9 per share, or $4.7 billion, to take over the entire company. A recent article out of Bloomberg, however, has speculated that Fairfax Financial may be denied credit to finance the leveraged buyout of BlackBerry. Interestingly, BlackBerry stock closed out the November 1, 2013 trading session at $7.77, which calculates out to a $4.1 billion market capitalization price tag.
A buyout package for BlackBerry out of Facebook may need to exceed the $9 per share offer out of Ontario-based Fairfax financial, in order to gain approval out of Canadian authorities and current shareholders. BlackBerry stock did establish an all-time high at $148.13, on June 19, 2008. As such, any takeover deal is at risk of being derailed by the litigation efforts of irate BlackBerry shareholders, if the acquirer failed to offer a significant premium above the current trading price. From Facebook's prospective, however, any proposal to pay more than $4.7 billion for BlackBerry would make little to no economic sense.
In effect, Wall Street traders have made rational calculations that the BlackBerry business model is all but worthless, as a going concern. BlackBerry did burn through $368 million in cash through the latest quarter to close out its Q2 2014 books with $1.2 billion in cash on the balance sheet. In terms of liquidity, the BlackBerry balance sheet did include $1.2 billion in short-term investments above $3 billion in accounts payable and accrued liabilities. Going forward, an acquirer may work to shut down unproductive segments of the BlackBerry mobile business, which may eat up another $300 million in restructuring charges. The remnants of BlackBerry would include $3.5 billion worth of intangible assets listed on the balance sheet. In reality, even this position is depreciating quickly, as several noted commentators have agreed that the smartphone patent bubble has dramatically burst. Conservative investors should acknowledge the aforementioned "let's just be friends" literal fireside chat out of the Facebook camp, and also dump BlackBerry stock.