BlackBerry and Microsoft Face Some Big Choices

Although we don't believe in timing the market or panicking over daily movements, we do like to keep an eye on market changes -- just in case they're material to our investing thesis.

Stocks are little changed to start off the first full week of November, with the S&P 500 and the narrower, price-weighted Dow Jones Industrial Average (DJINDICES: ^DJI  ) up just 0.14% each as of 10:05 a.m. EDT.

Microsoft (NASDAQ: MSFT  ) and BlackBerry (NASDAQ: BBRY  ) both operate in the mobile-devices market, and both now face important strategic questions -- although the latter is under a lot more pressure to come up with some answers.

At the beginning of October, with BlackBerry shares at $7.96, I wrote:

BlackBerry is in a terrible bind right now. Being acquired is its best hope, but the evidence that the Fairfax deal will be consummated on the original terms (or any terms) is unconvincing. ... I think BlackBerry's franchise – even in the business space -- could melt away much more quickly than investors anticipate. Consequently, the potential for further significant share-price losses is very real.

It now looks like the $9-per-share acquisition by a consortium led by Fairfax Financial is off; instead, BlackBerry announced today that it is raising $1 billion through a private placement of convertible debt (the debentures are convertible into equity at $10 per common share). Fairfax Financial has agreed to take up $250 million of the placement.

In addition, BlackBerry CEO Thorsten Heins will step down, to be replaced on an interim basis by former Sybase CEO John Chen, who will also become executive chair of the board. Fairfax CEO Prem Watsa will rejoin the board as lead director.

Mr. Watsa is manifestly a true believer, but I'm surprised BlackBerry is able to find investors to buy uncollateralized convertible debt when the conversion price into common equity is at hefty premium to the current share price, rather than a hefty discount. BlackBerry's stock changed hands at $6.84 at the time of writing -- a 12% decline from Friday's closing price.

And speaking of CEO succession, Microsoft chairman Bill Gates told the Financial Times that he plans to work closely with the next CEO. He also said he currently devotes a lot more time to Microsoft than the one day per week he had planned for when he stopped working there on a full-time basis. That interview may make some of Microsoft's major shareholders nervous: A group of them recently expressed their concern regarding the level of Bill Gates' potential influence in selecting the next CEO (Gates sits on the search committee).

Finally, Paul Ghaffari, the head of Paul Allen's family investment office, told a New York investors' event that Microsoft ought to consider spinning off some of its consumer businesses, such as its search engine Bing and its Xbox unit, to focus on the enterprise market. Allen co-founded Microsoft and still has a $2 billion stake. Ghaffari does not speak for Paul Allen directly, but he is in charge of managing Allen's assets, so he certainly has some influence. In addition, his view on Microsoft makes a lot of sense; the company's board and management would do well to give it due consideration.

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