Blackberry weighs option of a sale as operations review gets underway

Hopes of BlackBerry returning to its glory days have all but disappeared as the smartphone company delivered the most damning proof that its new phones are a sales flop by moving forward with a plan that could result in the sale of its operations.

Hopes of BlackBerry returning to its glory days have all but disappeared as the smartphone company delivered the most damning proof that its new phones are a sales flop by moving forward with a plan that could result in the sale of its operations.

The board of directors at the Waterloo, Ont.-based company launched a review of “strategic alternatives” on Monday, a move which it says could also potentially take BlackBerry in other directions, such as a partnership or joint venture.

Regardless of the outcome, the company’s future is uncertain.

BlackBerry could be scooped up by an interested buyer or even go private — an idea that has gained favour after reports said the board has recently opened to that option, even though it wasn’t specifically mentioned in the announcement.

Whichever path BlackBerry takes, the role of Fairfax Financial chief executive Prem Watsa is almost a certainty. The head of Canadian insurance company Fairfax resigned from the BlackBerry board on Monday due to potential conflicts with the review process.

The move suggests with near certainty that Watsa expects Fairfax will play a crucial role in the future direction of the company.

Watsa joined the board in early 2012 as part of attempts to revitalize BlackBerry, then called Research In Motion, and he has since increased his stake to about 10 per cent of the company.

“I continue to be a strong supporter of the company, the board and management as they move forward during this process,” he said in a statement issued by BlackBerry.

“Fairfax Financial has no current intention of selling its shares.”

BlackBerry shares rose nearly 11 per cent, or $1.08, to close at $11.13 on the Toronto Stock Exchange, which is about $8 below the high in January when the stock was boosted by optimism for its BlackBerry 10 smartphones.

In some ways, BlackBerry has been here before, with its future teetering on uncertainty, but the stakes are different this time around.

BlackBerry launched a softer review of its “strategic business model alternatives” in May 2012, which some analysts had expected would turn into a sale of certain assets. That never materialized and the company went on to launch its new line of phones.

Since then, the new high-end Blackberry 10 devices have struggled to gain favour in the highly competitive smartphone market dominated by Apple’s iPhone and the Android devices.

In the United States, the phones were considered a dud almost as quickly as they hit shelves and other regions, such as Canada and the United Kingdom, delivered lukewarm sales figures.

BlackBerry reached a crossroads last month when its new BlackBerry Q5, a cheaper version of the latest devices, arrived in stores to a tepid response. The phone was seen as a way to appeal to consumers who weren’t shopping for a high-end device, but it was met with both underwhelming reviews and sales figures anecdotally that fell short of expectations. Official sales data isn’t release by the company.

It seems that nearly everywhere BlackBerry turns, the confidence in its future has faded, and even with a potential sale of its operations ahead of it, some observers still aren’t hopeful.

“I think there is likely no bright future for Blackberry,” said Bernstein analyst Pierre Ferragu, in an email from the U.K. His firm has long been pessimistic about the company’s stock price.

“Their technology isn’t differentiated anymore, which means consumers won’t switch to them and larger players won’t buy them out for that. Chinese vendors or a Microsoft could at some point be interested in buying what’s left of their user base — especially corporate clients and the brand —but that wouldn’t be at a premium of today’s stock price.”

Other than that, the list of potential acquirers is short — with big players like Google and Apple out of the question — which makes it likely that a team of private equity players will make a move.

The company’s strategic review will be headed by Timothy Dattels, who joined BlackBerry’s board last year and is a senior partner at TPG Capital, one of the world’s largest private equity firms.

“Given the importance and strength of our technology, and the evolving industry and competitive landscape, we believe that now is the right time to explore strategic alternatives,” Dattel said in a statement.

BlackBerry founder Mike Lazaridis will also likely be involved, as he still owns 5.7 per cent of the company’s outstanding shares.

The biggest challenge is rallying enough large private equity partners who share a similar vision, and would be willing to fork over a huge chunk of money for a company teetering on an uncertain future.

Questions will be raised about which pieces of the BlackBerry’s operations could generate the most revenues, a factor which garnered plenty of attention in mid-2011 when the company first began to see its smartphone device marketshare tilt drastically lower.

QNX Software Systems, which BlackBerry acquired three years ago, has become a significant part of its business, playing a major role in the development of BlackBerry 10, as well as future technologies that integrate the operating system with automobiles.

BlackBerry also owns a wide array of patents, estimated somewhere in the range of 10,000 to 15,000, that cover advanced wireless technology, security, enterprise mobility and software.

“We don’t foresee any scenarios where the value of the company will be significantly larger,” said Tim Long, an analyst at the Bank of Montreal, in a note.

“While a change in structure could result in a higher stock price in the near term, we do not envision any changes that would help Blackberry reverse the significant smartphone share loss or rapid decline in service revenues.”

Research firm IDC issued a report last week which showed that BlackBerry has continued to lose its position in the second quarter, falling to 2.9 per cent of the market, even as its new phones rolled out across the globe. The company sold 6.8 million devices in the period.

Chief executive Heins said there are still “compelling long-term opportunities” for the company’s products including a new generation of smartphones, the BlackBerry Enterprise Server for business customers and a new secure global data network.

For more coverage of BlackBerry follow David Friend on Twitter.

http://www.twitter.com/dj—friend

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