Wednesday, August 14, 2013

More on BlackBerry

This is to give more discussion regarding news that BlackBerry formally announced that it is seeking "Strategic Alternatives" 
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Quick Recap:


On Monday, BlackBerry's board formed a special committee to explore "strategic alternatives" led by a senior partner of a PE firm. Prem Watsa, the largest shareholder of BlackBerry with 9.9% stake and a board member stepped down from the board citing "conflict of interest" in the review process. It is likely Fairfax will be involved as a buyer from the other side.The company mentioned that it is considering all options including JV, partnerships or a outright sale of the company. Given the tone of the press release is much more serious than before, there will be a significant announcement coming soon. The stock soared 20% after this news,  most likely speculating that BlackBerry is likely to sell it self rather than taking partnerships or JVs. 

What if the no deal (outright sale of company) go through? 

One of my good friend reminded me that it is important to consider if the strategic review doesn't result in a sale of the company. I agree with her that such result is likely see the recent 20% gains wiped out. However given Prem Watsa action to resign from board citing conflict of interest and he has $800 million at stake here, he will try his best to seek partners for a deal. Also, the heads of CPPIB and AIMCO has made comments that they are interested in looking at BlackBerry if it goes private. Although a sale of company far from guaranteed, other outcomes from this strategic review could be net positive for the company. A JV or partnership may seem useless at the surface, but may be valuable to spread the BB10 platform. A partial sale of the company is also possible with sale of hardware (device) side. So overall, I'm not ruling out the possibility of a bad outcome of strategic review but I'm positive the company is worth more than what is quoted by the market (Mr.market) now. As Buffett once said  in valuing a company's potential, the value of a company is very simple: Between zero and a whole lot. I'm leaning towards the whole lot and most I think are leaning towards the zero. Even if a deal falls apart, I think the company still has value. The last resort sell it in pieces but I think the going concern value will likely be higher if realized in 3-5 years as Prem suggested. 

My opinion: 


A lot of analysts (who I must remind everyone that most of them have a sell rating on the stock) expect no deal to pull through or even worst they expect an offer price significantly price below today's share price. The former argument is valid as I mentioned above that a straight sale is not the only option. The latter is rather silly in my opinion. Unless BlackBerry is facing a liquidity crunch or can't generate cash flow to meet its operating need, buyers will not offer some sort of premium if they want to buy out BlackBerry. BlackBerry's liquidity position is excellent with $3.1 billion in cash and working capital is excessive of $3.4 billion. Former deals such as Palm saw the buyer (HP) paying up to even buy a troubled company with negative book value but the value was in the patents. The big reason is the patent portfolio and BlackBerry has valuable portfolio to any strategic buyer. With over 9000 patents and 100,000 claims, this is one fact that is often overlook by most financial analysts. BlackBerry's network to 600 carriers globally is also another important consideration. 

Analysts often argue that BlackBerry is a sell because who would want to buy a company with only 3% market share (down from 5%). If I do recall correctly, that is exactly what the analysts said 16 years ago of a PC maker when its market sale fell significantly and suggested the company to sell itself in pieces (like what they are doing now for BlackBerry). For those who do remember, the company was Apple. Of course Thorsten Heins is no Steve Jobs but I see a lot of similarities when comparing the two situations despite the personnel differences. Analysts and crowd as a whole often forecast the future by using the past month, quarter or year as proxy for the next year or worst the next decade. As Apple bears found out in 1997, this is a horrible method of forecasting the future and valuing the company. The turnaround at Apple in 1997 did not take month, quarter or a year, it took years, yes I mean years. Those betting BlackBerry turnaround  with BB10 is failure because of a merely 5 month of sales are foolish. I was skeptical of BB10 until I tried it and was convinced the BB10 will help turn itself around. I completely agree with Prem Watsa that this may take 3-5 years. I also think BlackBerry's initiatives in mobile computing such as leveraging its QNX technology in cars and hospital are key growth area for the company. Those technology may propel BlackBerry back to "in motion". 

All in all, my opinion of the company hasn't really changed because this strategic review. I think they did the review because the BoD had enough of the ultra negative media reports and short sellers attacking the stock price which intensify the rumor the company is going bust. It'll be interesting to see how this news develop. 


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