BlackBerry acquisition, grim financials accelerate mobile migrations

Fairfax's BlackBerry acquisition is expected to result in a private company that can return to its roots as an enterprise devices and services maker. But there is reason for skepticism.

Following a week of grim financials and more layoffs, someone has swooped in to acquire BlackBerry and take the company private.

The combination of these events has prompted many BlackBerry customers to accelerate their migrations to other mobile devices and services.

BlackBerry signed a letter of intent this week under which a consortium to be led by Toronto-based Fairfax Financial Holdings Limited, which owns a 10% share in the company,  would acquire BlackBerry for $4.7 billion -- or $9 per share -- and take it private.

It would be prudent for companies…to think seriously about putting a transition plan in place.
Bob EganMobile Market Analyst, Sepharim Group

But Fairfax CEO Prem Watsa, a former BlackBerry Board of Directors member, may be more interested in divestiture than in making BlackBerry the successful smartphone company it once was, according to Bob Egan, a mobile market analyst, founder and CEO of Sepharim Group based in Falmouth, Mass.

"I told every client that has called me about this that 'if you weren’t before, you should be a lot more skeptical now,'" Egan said. "This guy buys distressed companies, breaks them up and sells them. The DNA of the letter of intent is not to rebuild."

Troubled companies can certainly be turned around, he added, but it would be tough for BlackBerry to come back when it is "this far down in the abyss."

Even before the acquisition plan came to light, industry watchers predicted that BlackBerry's business segments would eventually be sold off, particularly BlackBerry Messenger (BBM).  The company has planned to roll BBM out to competitive platforms this week, but the Android rollout stalled.

BlackBerry financials, acquisition scare customers off

BlackBerry reported last week a second quarter 2014 loss of nearly $1 billion, primarily due to losses from unsold BlackBerry Z10 devices. Those Z10 devices were designed to compete with touch-screen smartphones and lack the classic BlackBerry device keyboard. That didn't sit well with BlackBerry users, who rely on the devices for the keyboard.

"I have four devices total, but favor the BlackBerry [Q10] for work because I make mistakes in typing on glass," Egan said. "It made no sense for BlackBerry to deliver the Z10…anyone who has used an iPhone knows [the Z10] is a terrible experience."

News of BlackBerry's financial distress and the pending acquisition have put BlackBerry on the discussion table at many IT departments, including the Rhode Island Blood Center (RIBC) in Providence, R.I. 

"The fortitude of [BlackBerry's] loyal users slowly dwindled in most organizations, and ours was no exception," said David Reynolds, systems manager with the RIBC. But "they have a great position in the business community with their devices still."

The RIBC maintains support for a BlackBerry Bold user base and considers this deal something the company had to do in the face of spiraling revenue.

"They really were running out of options," Reynolds said.

Egan has a number of corporate clients who in 2012 planned to sunset BlackBerry devices over time in favor of Apple iPhone and Google Android devices, which end users prefer. But BlackBerry's "abysmal" financial results last week triggered many business customers to accelerate their transition to other mobile devices and this week's acquisition news has solidified their plans, Egan said.

"Last Friday I was overwhelmed with calls from CIOs who had conversations with IT directors saying 'we want to get off BlackBerry now, let's make that happen,'" Egan said.

With BlackBerry's failure to turnaround so far, the financial results and the pending acquisition, companies should develop an exit strategy, Egan said.

"It would be prudent for companies that haven’t started a transition to think seriously about putting a transition plan in place," he said.

Is Fairfax BlackBerry's light at the end of the tunnel?

However, going private may also allow the mobile device company to reorganize and refocus its business on enterprise customers "without shareholders breathing down their necks," said Michael Finneran, mobile analyst and president of dBrn Associates, Inc. based in Hewlett Neck, N.Y.

"BlackBerry still has a valuable franchise in secure enterprise mobility, and with 40% of enterprise mobile devices still being company-provided, this move will provide the opportunity to continue to develop its strategy out of the glare of shareholders," Finneran said.

BlackBerry does have some loyal business customers that simply don't want to give up the company's devices and software.

In fact, the company reported increasing adoption of BlackBerry Enterprise Service 10 (BES 10) during Q2 with more than 25,000 commercial and test servers installed to date, up from 19,000 in July 2013.

With positive BES 10 numbers, the company will refocus on the enterprise market where its devices and services are most widely used, BlackBerry said during its Q2 2014 report. It will continue to offer hardware, software and services to that market and consolidate its smartphone lineup from six to four devices, including two high-end devices and two entry-level devices, the company said in a press release.

Meanwhile, BlackBerry's restructuring plans will continue and include the reduction of approximately 4,500 employees and target reduction of its operating expenditures by approximately 50% by end of its first fiscal quarter 2015. Last week, BlackBerry cut another 40% of its workforce.

BlackBerry expects to report $1.6 billion in revenue for the second quarter on sales of approximately 3.7 million smartphones in the second quarter.

"Clearly they had an organization that was way too big for the business they generated," Finneran said.

The BlackBerry acquisition deal is subject to six weeks of due diligence, in which time the company can shop for other suitors. If BlackBerry does find another agreement, it would have to pay 30 cents per share, about $157 million, to Fairfax in a termination fee.

But Fairfax's offer -- a small premium over their current share price -- may be BlackBerry's only option, said Chris Silva, principal and founder of High Rock Strategy LLC, of Melrose, Mass.

"The solicitation for other bids and the existence of a pull-out clause for a better offer shows that BlackBerry is hoping for something better to come along, though that situation seems unlikely given how long it has taken for a suitor to emerge," Silva said.

A definitive transaction agreement is to be complete by November 4, 2013.

Diana Hwang contributed to this report

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