It should be considered ill-timed that BlackBerry Inc. announced it is seeking to privatize the company. The company is in the midst of launching a slew of new devices that run BlackBerry 10 operating system. Z10 was released this past February, Q10 a few months ago, and Q5 just recently. A premium A10 is rumored to be on its way.
By seeking a buyer at this time, Blackberry risks hurting current sales. Two key questions arise: why is Blackberry looking for a seller now, and what will this mean for Blackberry devices in the enterprise and consumer markets?
Answering the “Why”
Prem Watsa is CEO of Fairfax Financial, a large BlackBerry shareholder, who resigned from the board to avoid any conflict of interests, as BlackBerry either actively seeks a buyer or finds financial backers to become a private company. The motivation to privatize BlackBerry is very simple: the publicly traded company is undervalued. BlackBerry is worth just 0.57 of book value, and just 0.43 of sales. In the finance world this is known as price/book and price/sales, respectively. Even Nokia is worth more. Nokia is worth 1.55 times book, perhaps due to stronger Windows Phone 8 sales. Financially, BlackBerry is healthier than Nokia. BlackBerry does not have any debt, while Nokia has a debt/equity of 0.72.
Being accountable at a quarterly basis is also a distraction for BlackBerry, though this might not be a bad thing. BlackBerry can work on its own time schedule to revive its hardware, software, and middleware solutions as a private company. Yet as a public company, reporting the status quarterly could be good for the company: it keeps BlackBerry accountable to an innovation schedule.
Despite the risks of having a project schedule without quarterly updates, BlackBerry’s advertising could benefit from the absence of negative media coverage targeting the company. BlackBerry is spending more than US$1 billion on advertising. BlackBerry’s advertising could benefit from the absence of negative media attention, as a private company. Right now, media is constantly reminding us that BlackBerry is late in responding to the growth of Apple and Android.
What Could Happen Next
Who the buyer will be or who finances the privatization should be left to speculation. What happens next if BlackBerry privatizes? There are three scenarios that should be considered:
Scenario 1: Licence the consumer division
Sales for BlackBerry grew exponentially once the company first entered the consumer market. After Apple and Google’s Android took away market share, profits for BlackBerry devices plunged. The entry-level Curve was the only device that truly supported profits and sales. It might be time for the company to retrench.
BlackBerry might want to sell or license the consumer division of BlackBerry to Lenovo, IBM, Cisco Systems, Microsoft, Samsung, or Dell. These companies either do not have a mobile presence, or they want to diversify away from their current smart phone operating system (in the case of Samsung and Microsoft).
BlackBerry itself would wholly-own the enterprise business only, which includes the middleware, enterprise, and enterprise mobile hardware divisions. This would leave BlackBerry focused on its strength: messaging, email, calendar synching and appointment management, and security in the enterprise.
Scenario 2: Take the company private
A venture capital firm could assess BlackBerry’s future value based on a company able to more effectively market its product. Simply put, without the negative coverage on BlackBerry, the effectiveness of advertising will improve. It cannot stop there. The private entity would need to be revamping its advertising division to be more responsive to product releases and changing public opinion. The effectiveness of R&D would also need to be re-assessed. BlackBerry’s research department is already running more effective, thanks to BlackBerry 10 already released and being more stable. A BB10.2 SDK is also available, too.
Scenario 3: Company as a sold in parts
BlackBerry could be sold in parts, but this would be the worst scenario for the company. BlackBerry would be better of remaining a public company, taking on debt to buy back its shares, and boosting spending on product development and making further innovation in its enterprise software. There is inherent value in BBM (BlackBerry Messenger) as a standalone app, the middleware business, pre-BlackBerry 10, and BB10. However, the value of the company with these units together is worth more.
Most likely Scenario
The first scenario would be most ideal for BlackBerry [TSX:BB]. The smartphone market needs a BlackBerry as a 3rd or 4th device option for consumers. Heavy texting and messaging with a physical keyboard will have value in the consumer market. After all, it is considered a “must have” feature for many enterprise users.