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BlackBerry (NASDAQ: BBRY ) stunned investors this week by taking a different stance on its previously announced deal to go private. The company's plan to be bought out by Fairfax fell through due to a lack of financing, and now the company's shares have taken a massive hit. However, BlackBerry is raising cash to bolster its balance sheet and turn the company's fortunes around. Investors have been extremely unimpressed, sending the company's shares down roughly 15%.
The drama continues
BlackBerry's management and board have done a great job destroying shareholder value in the last few years. Now, the Canadian government is reportedly playing a big part in short-changing BlackBerry shareholders. According to reports from Bloomberg, Chinese smartphone manufacturer, Lenovo, was interested in making a bid for BlackBerry. However, the Canadian government made it very clear that it will not approve such a transaction by a Chinese company, citing security-related issues.
The deal by Fairfax was pegged at $9 per share, and a Lenovo bid would have been a massive boon for already-hurt BlackBerry shareholders. But, the impact of government intervention has scared away Lenovo from even making a bid, leaving shareholders to lick their wounds.
More skin in the game for Fairfax
Fairfax couldn't manage to get more partners or secure additional financing for taking the company private. Now, Fairfax will be investing up to $250 million in convertible unsecured debt in BlackBerry. Other investors will come up with $750 million to invest a total of $1 billion in BlackBerry. The company is offering 6% interest for these convertible debentures, which can be converted into common stock at $10 apiece for a period of seven years.
Even though the deal to go private hasn't gone through, BlackBerry will have a much stronger balance sheet, and Fairfax CEO, Prem Watsa, will rejoin the BlackBerry board. Investors should note that Fairfax has conducted extensive due diligence on BlackBerry's books and internal records, and only then decided to make this additional investment in the company.
The cash injection by Fairfax in BlackBerry's convertible debt points to a vote of confidence in the company by taking a longer-term view. But, Fairfax's investment might be simply a method to save its own original investment in BlackBerry common stock of roughly 10%.
While the smartphone market is becoming exceedingly competitive, BlackBerry is shedding more market share, mostly to phones running Google's (NASDAQ: GOOGL ) Android OS. According to Strategy Analytics, BlackBerry's market share fell to 1% in the third quarter of 2013, down from the previous year when the company held 4.3% market share. Android's market share surged to 81.3% in 3Q2013, up from 75% a year ago. In spite of an additional investment by Fairfax and other investors, if BlackBerry continues to lose market share, the company's turnaround efforts will be very challenging.
Can the new CEO turn things around?
BlackBerry remains a popular brand with enterprise customers focused on security, and the company's recent decisions are geared toward reviving that decline in brand perception. The company got rid of CEO Thorsten Heins and appointed John Chen as the new interim CEO. While the company has not been entirely forthcoming about its strategy going forward, the appointment of John Chen is a positive. He has been credited with turning around Sybase and selling to SAP in 2010. Plus, John Chen also sits on the board of iconic American companies like Walt Disney and Wells Fargo. In addition, John Chen is an advisor to leading private equity firm, Silver Lake.
BlackBerry's technology is maturing, and the appointment of an experienced tech-focused CEO and highly accomplished person, like John Chen, is a strong plus. The company has stated that it has stopped looking for additional buyers and will instead focus on strategy and growth. BlackBerry's executives and board are taking a long-term view on the company.
The issuance of convertible debt will allow the company more time to ramp up restructuring efforts and focus on R&D. If BlackBerry's share price rises above $10, the convertible debt holders will be able to exercise their options and own roughly 16% of the firm's outstanding stock. Based on the company's current trading price of below $7, shareholders would rejoice if the stock price reached anywhere near $10.
The smartphone market is becoming extremely competitive due to OEMs using Android and aggressively cutting prices. Plus, the company's restructuring efforts might eat away the cash balance further down the road. Based on competition in the market, the ability to grow its business sizably might be a long shot.
Then again, BlackBerry has a strong patent portfolio, social presence through BBM, and millions of subscribers. The company definitely needs to innovate and focus on its core customers if it wants to have even a small chance of being the former stock market darling that it was a few years ago.
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