by Gavin M. Using my once useful education as an analyst and market fanatic, I will present to you facts that are heavily reported on BlackBerry via Reuters et al. I am not making this into an opinion article. All based on facts and not my cooked up numbers. I hope this will at least shed some light on why I have been continuously short on BlackBerry all these years. Credits from sources go to Reuters, MT, DJ Newswires, BNN, CNBC, Bloomberg, WSJ, Financial Times, Yahoo Finance and etc. Recall back on 8/30 when Morgan Stanley (MS) noted that it would likely not be upgrading its users to Blackberry 10. This is a very rational decision given that the viability of BlackBerry is in question (and thus, MS cannot risk the possibility that the company will be unable to service any issues with the BB10). This makes sense because why would a company upgrade to a new service from BlackBerry which has a very questionable ahead of it? Sum of The Parts Taking a step back, a quick sum of the parts analysis by MT Newswires from August 30 gave investors an idea of what Blackberry's downside could be (using a 50% write down for the company's assets). Assuming $2 billion in patents and $2.6 billion in cash (given in the release) and $1.7 billion in receivables and inventory (including a 50% write-down), less $3.4 billion in overall liabilities (including accounts payable and accrued expenses), suggests a total value of just $2.9 billion. Dividing this by 525 million shares outstanding, BBRY is worth less than $6.00 per share. I did not make this number up, nor was the math unsound. These values are from Bloomberg, Thomson Reuters and all the other financial news sources. White Knight In the release late Friday, the company reiterated that the "Special Committee of the Board continues to evaluate strategic alternatives." Put simply, it means there has not been a "white knight" interested in the company - even for its patents - since it has been rumored to be up for sale for quite some time now, and the company still has yet to be scooped up. On August 12, Prem Watsa, Chairman and CEO of Fairfax Financial, also BlackBerry's largest shareholder, stepped down from the Board of Directors due to a potential conflict of interest. This sparked speculation of a possible buyout by Watsa. Although this was highlighted by media/press reports as an incremental positive, as far as investors can ascertain, Watsa has reached out to pension plans in Canada, but there have been no bids to date. The company has been on the block as a takeover target for over 2 years, although it was not openly acknowledged in writing until August 12. Since the rumors came to light, no realistic buyers have stepped forward so it is not a stretch to assume that interest in the company has been abysmal. Thorsten's Compensation In an acquisition scenario, CEO Heins' departing compensation package is also worth pointing out, as it is seen by analysts as not in line with shareholder interests. His severance starts at $20 million upon a buyout, based on the company's proxy filing in May. Critically, the severance is not based on shareholder performance. So really, who wins when they get bought out? The executive team, DUH. Going Private Separately, there has also been speculation that the company will go private, but this is also unlikely. In a leveraged buy out (LBO), private equity investors use debt (usually low investment grade) to purchase the company, and the assets of said company are used as collateral. Because debt used is usually low investment grade (or even junk), interest rates are much steeper. In BBRY's case, going private is not a viable alternative as projections for operating cash flows are not high enough to support the uptick in interest expenses. According to Goldman Sachs, assuming EBITDA margins stay flat (which are still lofty), the company would need to generate a 5-year revenue CAGR (compound annual growth rate) of 12% to generate an internal rate of return (IRR) of 10% - the usual threshold for private equity investors. Owing to Blackberry's share losses in the smartphone market, analysts are currently projecting a long-term revenue loss rate of 6%, per Thomson Reuters, and this doesn't even include the negative pre-announcement on Friday. In Retrospect And so the question arises - what happened? In October 2007, Blackberry had 10 million subscribers and was the leading smartphone in the enterprise and business market (Steve Jobs had already unveiled the iPhone earlier that year in January, at first targeting consumers). At that point in time, the company made a crucial error in judgment. Apple could have the consumer market, and the iPhone wasn't a threat. In the company's defense, there were still loyal Blackberry users who liked its keyboard and blackberry messaging features (BBM). In August 2007, shares in the Canadian maker of BlackBerry smartphones peaked at $236, and the firm was coined as the "most valuable company in Canada by market capitalization." The company introduced new products, such as the Bold, to compete with the iPhone. It also had a touch screen, which is the exact opposite of what loyal users wanted (with most sticking with the Curve, as it still had a keyboard). In short, it has been steep fall from grace from the time BBRY held its dominant share in the smartphone market. Gavin's Opinionated Take This is the only portion of this post that is subjective and without fact: Perhaps, the only choice BlackBerry has, is to throw in the towel and file for bankruptcy before it burns through its remaining cash reserves.
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