BlackBerry (NASDAQ:BBRY) announced Monday that it has abandoned its plan to sell itself and will instead raise $1 billion worth of convertible debt from institutional investors, including its largest shareholder Fairfax, which has pledged $250 million to the deal. Upon the closing of this transaction in about two weeks, CEO Thorsten Heins will step down and be replaced by John Chen as BlackBerry’s interim CEO. As the former Chairman and CEO of Sybase, Chen has been widely credited with turning around the struggling company’s fortunes in the late 90s, before selling it to SAP in 2010. The management shake-up at BlackBerry extends well beyond the CEO change, with Chen replacing Barbara Stymiest as the Chair of BlackBerry’s Board and David Kerr resigning from the Board as Director. Prem Watsa, Fairfax’s CEO and Chairman, who had resigned following Fairfax’s bid on BlackBerry citing conflict of interest, will rejoin as Lead Director.
These changes come after a two-month review of strategic options, which was rumored to have included bids from Facebook, Lenovo and private equity firms such as Cerberus, in addition to Fairfax’s formal offer of $4.7 billion. The final decision to continue to remain public was unexpected and raised fears that BlackBerry did not attract a substantial bid from any of the suitors, leading to a huge 16% pullback in its stock price. While an outright sale of the company does not seem imminent after the recent turn of events, BlackBerry’s slumping smartphone market share means that the new CEO will likely oversee the company’s transition to a niche enterprise player and then potentially sell it in parts to maximize value. The additional cash raised buys the new management more time to restructure and stabilize the enterprise business.
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Value In Enterprise Niche
While BlackBerry’s patent portfolio could interest some companies going forward, BlackBerry’s secure enterprise network holds the most value for a potential buyer 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 revenues away from retail. Relationships with enterprises are generally more stable than with 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. By our estimates, the Push Email business is BlackBerry’s most valuable (more than 35% of our $9 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.
However, the enterprise market is seeing companies increasingly being open about employees bringing their own devices to work. Although BlackBerry’s installed base is big, it is losing share to Apple and Samsung among the devices being sold to businesses and their employees. 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.
Services and Patents More Valuable Than Hardware
The transition back to its enterprise roots has already started at BlackBerry, with the company reducing its future smartphone portfolio 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 its workforce by about a third and cut operating expenses in half by May. For the consumer market, BlackBerry plans to leverage BBM’s popularity by making it available to Android and iOS as well. BlackBerry’s new leadership 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, it 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.
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. However, the mobile BB10 platform could attract the attention of someone like Samsung, which may be 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. 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 a 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 BlackBerry attract a substantial bid from someone looking to make a play in the emerging smartcar market down the road.