On September 3, 2013, Microsoft (NASDAQ:MSFT) issued a statement that it would pay $7.2 billion to acquire the Nokia handset and device business, while agreeing to license Nokia (NYSE:NOK) patents and mapping technology. Shares of Nokia immediately gapped up from $3.90 to $5.45 upon the news, before closing out the September 3 trading session at $5.12. Alternatively, Microsoft stock lost 6.5% of its value within the forty-eight hour period following this recent Nokia acquisition announcement. With the smoke clearing away from this Microsoft - Nokia deal, investors have promptly turned their collective attention towards analyzing BlackBerry's (BBRY) future place within the mobile market. BlackBerry executives have already telegraphed their intent to close out a sale of the company prior to the end of November 2013.
Certainly, BlackBerry shareholders are taking management at their word. BlackBerry stock is literally trading off hope for an acquisition. Bulls, however, have not calculated that the rapid collapse of the BlackBerry business model prohibits the proposal of viable offers at current market levels. Be advised that BlackBerry stock is ripe for speculative rumor mongering and extreme volatility, due to its relatively small float. According to Yahoo Finance, traders had sold 153 million BlackBerry shares short, as of August 15, 2013. BlackBerry listed a mere 524.2 million shares of common stock outstanding within its recent Q1 2014 report for period ended June 1, 2013. At $10.40 per share and $5.5 billion in market capitalization, BlackBerry stock is a value trap that should be sold.
Fairfax Financial, Private Equity, and BlackBerry
On August 12, 2013, the BlackBerry board of directors issued a statement indicating the "exploration of strategic alternatives" for the company. A Special Committee was assigned the task of evaluating the economics of strategic alternatives that would include partnerships, a breakup of the company into separate divisions for multiple buyers, or an outright sale of BlackBerry in its entirety. In conjunction with this statement, Prem Watsa, Fairfax Financial CEO, also announced that he would promptly step down from the board of directors in order to avoid any conflict of interest. Fairfax Financial is the top shareholder at BlackBerry and owns 10% of the company. Prem Watsa is often referred to as the "Warren Buffett of Canada."
On September 9, 2013, BlackBerry shares tacked on 69 cents, or 6.4%, to close out the trading session at $11.53. That day, the investment wires had published stories of Prem Watsa working to cobble together a consortium of private equity and pension funds to acquire BlackBerry. The following day, sources close to The Globe and Mail reported that no large funds agreed to join Watsa in his quest to acquire BlackBerry. In a turn of events, the paper also intimated that Fairfax might be looking to unload its own stake within BlackBerry. BlackBerry stock immediately gave back its gains from the prior day to close out the September 10 trading session at $10.94 per share.
Misguided BlackBerry bulls must recognize barriers of entry separating private equity and technology business models. Private equity firms specialize in leveraging credit to purchase struggling enterprises on the cheap. From there, operations can be streamlined through layoffs and cost cutting. At a later date, the newly reformed and cash rich business may be sold off at steep profits. Financial engineering, however, will not save BlackBerry. BlackBerry is not "cool" in college dormitories. In other words, Wall Street analysts would agree that the BlackBerry brand maintains no real goodwill. Private equity firms lack the technical knowledge and financing to drive BlackBerry towards relevance within the fast-moving mobile market, where cache is King.
Again, BlackBerry trades near $5.5 billion in market capitalization. A private equity consortium would need to assemble at least $7.25 billion to pay off shareholders and avoid lawsuits derailing the offer. A bid to take BlackBerry private may add $5 billion in debt to the balance sheet. The servicing of this debt alone may ultimately force the then private company to tap into the $2.8 billion in cash and short-term investment reserves now on the balance sheet. For Q1 2014 ended June 1, 2013, BlackBerry posted a $42 million increase in cash above the prior quarter, after spending a net $91 million to purchase short-term investments. The majority of private equity firms lack the means and technical knowhow to bankroll this operation through the launch of next-generation products and "killer" applications. Bulls, of course, again will quickly turn their attention to Microsoft and other cash rich multinational corporations, such as IBM (NYSE:IBM) and Cisco (NASDAQ:CSCO).
BlackBerry and Enterprise
BlackBerry bulls must come to terms with just how far the mighty have fallen. On September 6, 2013, research firm comScore released its July 2013 U.S. smartphone subscriber market share report. The report published averages of data collected between the April 2013 and July 2013 quarter. During this time frame, the Google (NASDAQ:GOOG) Android - Apple (NASDAQ:AAPL) iOS duopoly actually gained in strength to operate 92.2% of U.S. smartphone subscriptions. At the bottom of the heap, BlackBerry and Microsoft operating systems accounted for respective 4.3% and 3% shares of this market. The BlackBerry operating system lost 0.8% share on a quarter-to-quarter, sequential basis. Recent data out of both comScore and International Data Corporation (IDC) also confirmed that BlackBerry is a non-factor as an original equipment manufacturer (OEM). Apple and Samsung are by far and away the leading handset and tablet device makers.
BlackBerry reported the fact that it shipped 6.8 million smartphones during its latest Q1 2014 as a highlight. In reality, the BlackBerry 10 platform failed to gain real traction within the mobile market. Going forward, BlackBerry handset sales will continue to deteriorate, as prospective customers fear the loss of ongoing support amid buyout speculation. At the same time, the Microsoft cash flow and marketing machine can now mobilize to hawk Windows and Asha phones through all price points, which would include emerging markets. In theory, BlackBerry handset and intellectual property are worthless, because they lack a niche market that can be leveraged to turn profits.
BlackBerry has built its reputation as a serious brand for IT professionals who value security. As such, BlackBerry bulls may cling to the case that this company can still be a valuable player within the market for enterprise communications and software. Earlier this year, BlackBerry lost its exclusive contract to The Pentagon, as government officials granted clearance for iOS and Android devices to flank Department of Defense networks. For its 2013 fiscal year ended July 18, 2013, Microsoft reported that its Server and Tools and Business operating segments accounted for $45 billion out of $77.8 billion in total net sales at the company. Microsoft also generated $28.8 billion in cash flow from operations this past year. Microsoft obviously controls the financial heft to bundle Windows phones and business software to institutional buyers, at the expense of prospective BlackBerry sales. Corporate America is not willing to take on any parts of BlackBerry against such long odds.
The Bottom Line
BlackBerry bulls should wave the white flag of surrender at Waterloo and sell out now. A scathing February 2012 piece by Jesse Hicks and The Verge blamed the inevitable fall of the BlackBerry Empire upon engineers and executives who placed technical wonkery above consumer demand. The BlackBerry business model is now surrounded upon all fronts. On May 29, 2012, Research in Motion announced that it had hired J.P. Morgan and RBC investment bankers to perform a strategic review of the company. Despite a name change to BlackBerry, this company has been unable to shed its somewhat dowdy early 2000's image. Sophisticated investors have telegraphed that they believe this business to be worthless.
The $13 billion balance sheet does include $2.8 billion in cash and short-term investments. On paper, it would appear that Wall Street has set a bargain bin price tag of $2.7 billion ($5.5 billion market capitalization - $2.8 billion in cash and investments = $2.7 billion) for the BlackBerry business. Upon further research, however, the BlackBerry balance sheet does include $5.7 billion worth of intangible assets, property, plant, and equipment, above $3 billion in liabilities. In reality, BlackBerry intellectual property is depreciating rapidly towards zero. Inevitable write offs of BlackBerry intangible assets may damage shareholder equity through this current quarter. Going forward, BlackBerry executives are also likely to throw cash at sales and marketing initiatives, unable to compete against the next wave of Holiday Season smartphones.
At this junction in time, BlackBerry is barely worth the cash that it keeps on hand.
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.