BlackBerry: Strategic Alternatives Signal Failure

| About: BlackBerry Ltd. (BBRY)

By RJ Towner

After the launch of its new phone and operating system came and went without much fanfare, smartphone maker BlackBerry (NASDAQ:BBRY) announced that it is exploring strategic alternatives for the company. Although most tend to associate strategic alternatives with selling the company, Blackberry is also open to partnerships and joint-ventures.

Let's start with the obvious inference out of this news: BlackBerry 10 didn't save the company. If this wasn't clear enough when Blackberry reported weak results for its fiscal year 2014 first quarter, we think the situation is obvious now. Consumers, particularly of the high-end smartphone variety, simply do not want BlackBerry products. The app world is far inferior to competitors Apple (NASDAQ:AAPL) and Google (NASDAQ:GOOG), and with phone sales levels relatively low, there is little incentive for a developer to work on the BlackBerry platform. BlackBerry is then stuck in the circular problem of needing developers to gain customers, but will only get developers if they have customers.

We did not believe BlackBerry would be a real challenge to the iPhone or the Android ecosystem, and we have no reason to believe a change is in the cards. CEO Thorstein Heins and the board of directors seem to agree that BlackBerry can't turn around itself.

That leads us to the natural question: will someone acquire BlackBerry?

Let's immediately eliminate Apple, since a deal between the two doesn't make much sense (though we note Apple could pick it up just to unwind it and keep it out of the hands of current and/or future competitors - stranger things have happened). Google could be interested, but would the firm want to add another weak hardware business into the fold after the acquisition of Motorola Mobility continues to weigh on results? We doubt it.

Microsoft (NASDAQ:MSFT) can be connected to almost any tech name on the block with its enormous cash hoard and recent history of making some relatively large acquisitions (Skype comes to mind). We've seen the company restructure to focus on hardware and software integration (like Apple), and the tech giant currently does not manufacture its own phones.

After the massive Surface impairment, Microsoft may be looking at itself and wondering whether or not it can create a great hardware experience. BlackBerry has made successful products in the past, and Microsoft could be interested in getting its hands on a hardware maker with a robust patent portfolio.

On the other hand, Microsoft could have acquired BlackBerry when its shares were much cheaper. Further, we don't see why Microsoft would choose BlackBerry over Nokia (NYSE:NOK), a company Microsoft has collaborated with for its mobile efforts in the past.

Unfortunately for BlackBerry, the list of potential acquirers likely begins and ends with Microsoft. We've heard whispers of private equity firms growing interested in BlackBerry, but we don't think that would solve BlackBerry's troubles. We also fail to see how being a private company would be an improvement for the firm, strategically. A large computer hardware maker such as HP (NYSE:HPQ) could look to get (back) into mobile, but the firm could also simply make its own smartphones for a lot cheaper than it could to acquire BlackBerry.

Valuentum's Take

Though Blackberry may look to sell itself, we aren't sure there are many options. Rumors of a BlackBerry-Microsoft alliance have been around for the past few years, but we see little evidence of anything more than rumors. Private equity firms may be interested in running the business for cash, and in such a scenario we see little upside to the share price.

At the moment, we do not see a compelling reason to establish a position in the smartphone maker in the portfolio of our Best Ideas Newsletter as fundamentals continue to decline and the primary "exit" plan would be a buyout.

Disclosure: I am long AAPL. 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.

Additional disclosure: RJ Towner owns shares of AAPL. Valuentum does not own shares of any publicly-traded entity. AAPL, GOOG, and MSFT are included in Valuentum's actively-managed portfolios.

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