BlackBerry (NYSE:BB) has taken its investors on a roller-coaster ride over the past few years. The company changed its name, released a new phone, and rolled out a new operating system. Of these initiatives, though, not much has been able to impede BlackBerry's shocking fall.
The situation now takes an interesting turn, because it was revealed that a company signed a preliminary agreement to take BlackBerry private for $9 per share. Investors are either delighted or devastated on the news, depending on where they bought the stock. Nevertheless, this is far from a done deal, and investors need to weigh their options. At the present time, should investors (and BlackBerry itself) hold out for a better price? Or should investors jump off what likely amounts to a sinking ship?
Fairfax to the rescue
Fairfax Financial Holdings, a Canadian insurance company, may purchase the 90% of BlackBerry shares that it doesn't already own, after a six-week period. The firm owns about 10% of BlackBerry stock, and agreed to possibly purchase the remaining shares for $9 apiece come November 4, for a total deal price of $4.7 billion. The agreement presumably kicks off a process where BlackBerry can now try to find a higher bidder for itself.
Meanwhile, Fairfax will continue to do its due diligence, a wise move considering BlackBerry's precarious situation. Sales and profits are simply falling off a cliff. The company saw revenue fall 40% in fiscal 2013 versus the prior full fiscal year. BlackBerry wasn't profitable in fiscal 2013, either, reporting a $628 million loss for the year.
Times haven't gotten easier this year, either, despite the release of the company's Z10 smartphone. On September 20, BlackBerry warned investors that it would lose between $950 million and $995 million this quarter. In conjunction with the announcement, the company said it would cut 4,500 jobs, and the stock fell 17% on the day. Looking back further, it's plain to see how far BlackBerry has fallen. In fiscal 2007, BlackBerry (then known as Research in Motion) booked a $631 million profit.
It's not entirely difficult to see how BlackBerry got into this situation. BlackBerry's devices and its operating system have failed to catch on with consumers, who have moved on to other devices, including the Android, offered by Google (NASDAQ:GOOGL), or Apple's (NASDAQ:AAPL) iPhone. BlackBerry is even falling behind in the enterprise market, which it used to dominate. The Android and iOS operating systems together hold more than 92% of the smartphone market. BlackBerry's own OS holds exactly 2.7% of the market.
Furthermore, BlackBerry isn't expected to participate in the fast-growing worldwide mobile phone market, which research firm IDC expects to grow 7.3% this year. Again, Apple and Google dominate in smartphone sales. The iPhone and Android made up 92% of smartphones sold in the three-month period ended July 2013. BlackBerry's share actually dropped a full percentage point, to 4.3%.
Valuation is very difficult to determine
For investors trying to decipher a value for BlackBerry, good luck. It's extremely difficult, because a great deal of BlackBerry's intrinsic value is locked up in its extensive patent portfolio. Non-cash assets can be hard to value, since when you get down to it, the value of an asset is simply what someone else is willing to pay.
This is even more difficult when you're dealing with an asset like patents, which may or may not realize the value they're prescribed. BlackBerry currently holds more than 5,200 U.S. patents and roughly 3,700 additional patent applications. For what it's worth, MDB Capital Group pegged the total potential value at between $3 billion and $5 billion.
Add in the nearly $3 billion in cash and cash equivalents on its balance sheet, and you can begin to question whether BlackBerry is actually still undervalued. However, if that's your position, a dose of caution may be appropriate.
A hidden risk still remains
As tempting as it is to want to hold out for a better price, the opposite side of the argument merits attention. That is to say, there's a separate risk that bears discussion: execution risk. It's worth remembering that this is merely a preliminary deal.
Put simply, the deal is far from a sure thing. The agreement calls for exactly six weeks of waiting, and of all the possible outcomes, we can't absolutely deny the chance that Fairfax will walk away. If that happens, BlackBerry would be extremely hard-pressed to find a better bid. Plus, Fairfax still needs to line up financing to fund the deal, which isn't guaranteed.
BlackBerry's business is collapsing. Should the Fairfax deal fall through, a bidding war simply isn't a realistic scenario for a company whose sales are in free-fall and is consistently reporting quarterly losses. While it's impossible to know exactly how this will play out, it's easy to see the rationale of investors taking $9 per share and investing the proceeds in Apple or Google, the two stocks profiting the most from BlackBerry's downfall.
Bob Ciura owns shares of Apple. The Motley Fool recommends Apple and Google. The Motley Fool owns shares of Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.