BlackBerry Returns to Corporate Users to Dodge Oblivion

Sept. 23 (Bloomberg) -- Bloomberg's Hugo Miller reports on the future for BlackBerry. He speaks with Betty Liu on Bloomberg Television's "In The Loop." (Source: Bloomberg)

BlackBerry Ltd. (BB), facing mounting losses and dwindling buyout prospects, is slashing its workforce and product line and refocusing on the market that first brought it success: corporate customers.

The Waterloo, Ontario-based company said last week that it’s cutting 4,500 jobs and taking a writedown of as much as $960 million for unsold inventory of its Z10 phone -- a touch-screen device unveiled in January as its answer to the iPhone.

Chief Executive Officer Thorsten Heins had bet the Z10 would become BlackBerry’s new flagship, restoring cachet and prosperity to the one-time smartphone leader. Instead, the model fizzled with consumers and contributed to the company’s weakest quarterly sales in six years.

Attempts to find an acquirer have been fruitless so far. Fairfax Financial Holdings Ltd. (FFH), BlackBerry’s largest shareholder, has contacted private-equity firms in a bid to line up a buyer, without success, according to a person with knowledge of the matter. With no immediate prospects of a white knight acquiring BlackBerry, the company has no choice but to zero in on business customers and try to shrink its way to profitability, said Colin Gillis, an analyst at BGC Partners LP in New York.

Photographer: Scott Eells/Bloomberg

Writing off the unsold phones would put a dent in net income and signal that the BlackBerry 10 operating system isn’t fueling a turnaround for the Waterloo, Ontario-based company. Close

Writing off the unsold phones would put a dent in net income and signal that the... Read More

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Photographer: Scott Eells/Bloomberg

Writing off the unsold phones would put a dent in net income and signal that the BlackBerry 10 operating system isn’t fueling a turnaround for the Waterloo, Ontario-based company.

“It’s the end of an era: BlackBerry as we knew it is over,” said Gillis, who recommends selling BlackBerry’s stock. “They’re refocusing on a much smaller niche enterprise-focused company and that’s a reasonable strategy for them.”

Shares Drop

The shares declined 2 percent to $8.55 at 9:52 a.m. in New York, adding to the 17 percent decline on Sept. 20, the day of the announcement. As of last week, the stock had fallen 94 percent from its 2008 high.

RBC Capital Markets, Paradigm Capital Inc. and Jefferies & Co. downgraded the stock. Credit Suisse Group AG upgraded it to neutral, saying its risks are already reflected in the price. Robert W. Baird also upgraded the shares to neutral.

BlackBerry, credited with inventing the first smartphones more than a decade ago, once sold products that were so popular and addictive they were known as CrackBerrys. In recent years, the company failed to keep pace with Apple Inc. (AAPL) and Samsung Electronics Co. (005930), which offered better Web browsing and a wider range of applications. BlackBerry’s share of the global smartphone market shrank to 2.9 percent in the second quarter from 4.9 percent a year earlier, according to IDC. It has fallen to fourth place behind Google Inc.’s Android, Apple’s iOS and Microsoft Corp.’s Windows Phone platform.

Touch Screens

Still, the company continues to unveil new products based on its revamped BB10 operating system, including a model last week that will be the largest touch-screen BlackBerry ever. It also opened up its BlackBerry Messenger instant-messaging service to Android and iPhone users over the weekend -- though that effort also hit a snag. The rollout was suspended yesterday because of technical difficulties.

The Z10 was an attempt to show that BlackBerry could compete in the touch-screen arena. The company is best known for its physical keyboards, which bankers and lawyers have prized for their ability to crank out e-mails. With its lackluster sales, the Z10 failed to demonstrate that BlackBerry can challenge the broader market for touch-screen smartphones.

While BlackBerry isn’t abandoning touch screens, it will pare its product line from six models to four and only target corporate and professional customers, the company said last week. Still, even formerly loyal business customers are wavering. Morgan Stanley (MS), for instance, is holding off on upgrading its employees to BB10 because of concerns that the Canadian company may not back its platform long-term, according to two people with knowledge of the bank’s plans.

Private Equity?

An acquisition of BlackBerry could help the product live on, though that prospect also may be dim. While the company reiterated last week that it’s open to a potential buyout, the latest results may have made it that much harder to find a suitor, said Michael Genovese, an analyst at MKM Partners in Greenwich, Connecticut. BlackBerry’s main benefit may be the services revenue it extracts from existing users, he said.

“I don’t think anyone wants these handsets. I don’t think anyone even wants this software,” said Genovese, who rates BlackBerry a sell. “The only kind of company I can see buying them is private equity and private equity will say, ‘We can pay X for BlackBerry just to milk that services-revenue stream.’”

As of June, BlackBerry had 72 million subscribers -- down from 76 million in the previous three months. The company didn’t give a figure for the most recent quarter.

JPMorgan and RBC Capital Markets spent close to a year quietly canvassing potential BlackBerry acquirers without success, people with knowledge of the matter said last month.

Shareholder’s Effort

When BlackBerry formed a board committee last month to explore a possible sale, Fairfax CEO Prem Watsa stepped down as a director. That allowed the Toronto businessman to begin discussing a local bid for the smartphone maker without potential conflicts of interest. Fairfax held a 9.9 percent stake in BlackBerry as of June 30.

Fairfax President Paul Rivett, reached after BlackBerry’s Sept. 20 results, declined to comment on whether the company is leading a buyout of BlackBerry.

The company still has significant assets on its books and no debt. It had $2.6 billion in cash and equivalents at the end of last quarter, down from $3.1 billion three months earlier. Its patent portfolio and secure e-mail network may be worth at least $1 billion apiece, estimates Tim Long, an analyst at BMO Capital Markets.

Take-Under Bid?

If the company is bought whole, the buyer would likely shut down the hardware business, given its downward spiral, according to Michael Walkley, an analyst at Canaccord Genuity Inc. BMO’s Long, who rates BlackBerry a hold, has estimated the cost of closing that business at about $800 million, making it a liability rather than an asset.

If it does entice a buyer, BlackBerry may have to cut its losses and settle for a so-called take-under bid, where the per-share price is below the value of the stock.

“You face the question of: ‘Do I continue to operate this business with deteriorating fundamentals and perhaps burn cash flow, which ultimately will end up badly?’” said Brian Huen, managing partner at Red Sky Capital Management in Toronto. His firm, which manages about C$220 million ($214 million) in assets, dumped its small remaining holdings in BlackBerry after last week’s surprise announcement.

Brian Blair, an analyst at Wedge Partners in New York, agrees there is some value in BlackBerry’s patent portfolio and its dwindling legacy of subscribers -- but the company will fetch $7 or $8 a share at best, less than the stock’s current value.

“Sales have hit a wall and this is only going to get worse,” he said.

To contact the reporter on this story: Hugo Miller in Toronto at hugomiller@bloomberg.net

To contact the editor responsible for this story: Nick Turner at nturner7@bloomberg.net

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