Merely days after giving a grim business update about its fiscal second quarter earnings, BlackBerry (NASDAQ:BBRY) has agreed to be bought out by a consortium led by Fairfax Financial Holdings founder Prem Watsa for about $4.7 billion in cash. While the move does not stop BlackBerry from entertaining counter-offers, the $9 per share deal has set a floor on the amount of value that shareholders will receive should they agree to the buyout in the coming months. The deal was one among many that were being speculated about ever since BlackBerry announced that it was evaluating strategic alternatives including a possible sale of the company and Prem Watsa subsequently resigned from the board citing a conflict of interest. With BlackBerry’s smartphone market share slumping amid growing competition from the increasingly dominant ecosystems of Android and iOS, the new owners will likely oversee the company’s transition to a niche enterprise player and then probably sell it in parts to maximize value.
The transition back to its enterprise roots has already started at BlackBerry, with the company announcing that it is reducing its future smartphone portfolio down from 6 to 4 devices as it targets a much reduced but focused customer demographic in enterprises. It has also announced job cuts to the tune of 4,500 that will reduce workforce by about a third and reduce operating expenses by a half by May. For the consumer market, BlackBerry plans to leverage BBM’s popularity by making it available to the other platforms, Android and iOS, as well. Fairfax will therefore be looking to stabilize the enterprise business and run it for cash while growing BBM’s user base to unlock value in the form of a potential sell-off down the road. As for patents, while the company hasn’t yet disclosed how it would monetize them, Fairfax will probably look for buyers or get aggressive at suing rivals for cash considering the higher leverage it has now that there is hardly any value in the handset division to be counter-sued against.
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Services and Patents More Valuable Than Hardware
While BlackBerry’s patent portfolio could interest some buyers, BlackBerry’s secure enterprise network holds the most value for a potential buyer in in the smartphone industry. With the high-end smartphone market getting saturated, companies such as Samsung are looking to strengthen their enterprise offerings and diversify their revenues away from retail. Relationships with enterprises are generally more stable than consumers, as can be seen with BlackBerry whose high-margin Push Email service business continues to be profitable and more stable amid slumping hardware sales. While device sales fell by about a half this quarter, service revenues remained steady at about $800 million. By our estimates, the Push Email business is BlackBerry’s most valuable (more than 40% of our $11.20 price estimate) and cash-generating asset right now, and continues to be the gold-standard when it comes to enterprise security and solidity of service.
The enterprise market is however seeing enterprises increasingly being open about employees bringing their own devices to work. Although BlackBerry’s installed base is huge, it is losing share among the devices being sold to corporates and their employees to Apple and Samsung. Globally, its business devices market share has declined from over 30% in 2010 to about 8% in three years. Closer home, BlackBerry’s enterprise share has fallen even more drastically from about 70% to 5% in the same period. While device sales are likely to decline even further, BlackBerry could still benefit from having a large installed BES base with a proven mobile device management software (MDM) that now has cross-platform support. This is invaluable to the large security-conscious enterprises and government organizations that do not want to undertake the complex process of transitioning all their devices to a different management solution. Watsa could be looking to maintain BlackBerry’s niche there.
The BBM messaging service is another BlackBerry asset that could be valuable to a potential buyer looking to turn it into a big competitor to the likes of Whatsapp and WeChat. While these competitors have more than four times as many subscribers as BlackBerry, the company recently opened its BBM service to other platforms which could help it catch up with the leaders in the coming years. BBM would then be attractive for a smartphone maker looking to build an ecosystem around its products, but the rise of cross-platform messaging apps has decreased BBM’s value-add to the end user. However, BBM’s popularity is still huge in emerging markets, and it could be of some value to a predominantly emerging market smartphone player.
The hardware business does not seem to be very valuable by itself given the sustained decline in market share which has caused to slip behind Windows Phone into the fourth place. But the mobile BB10 platform could attract the attention of someone like Samsung which is probably looking to diversify away from Android given Google’s potentially big hardware aspirations with Motorola. BlackBerry has, in the past, showed a willingness to license out its BB10 platform to other vendors but Samsung is likely to be more interested in having its own OS to build an ecosystem around it. That said, there are already two heavily dominant mobile ecosystems in the form of iOS and Android, and Windows Phone seems to be well on course to becoming the third one of some standing. A fourth mobile platform may therefore not command a premium and be only incremental to whatever value buyers attach to BlackBerry’s patent portfolio and services. At the same time, the fact that BB10 is built on QNX, a real-time operating system that is well suited for automobiles, could help Fairfax attract a substantial bid from someone looking to make a play in the emerging smartcar market down the road.