Why decide to shrink the company before knowing what the buyer wants to buy?
The news out of BlackBerry (BB:TSX, BBRY:Q) on Friday was bleak, with 40% layoffs and a writedown of millions of unsold consumer-oriented Z10 phones. The layoffs are painful for those affected, and the Waterloo community in particular. But for shareholders, the deep cuts may well mean that the BlackBerry Board of Directors is getting the house in order for a go-it-alone strategy now that they’ve got the feedback of the world’s strategic buyers.
Sadly, it is the correct decision if the current M&A process has taught them that none of Samsung, Microsoft, Amazon or Lenovo want to buy the company as it is currently structured. Why else would the Board cut the company practically in half in advance of a takeover? You didn’t see similar moves prior to the acquisitions of Bridgewater, Dalsa, Miranda Technologies, MKS or Q9 Networks, to name five recent public takeovers (see prior post “Another day, another Canadian tech M&A deal” June 6-12). Simply because there is no way of knowing which divisions the likely buyer(s) would want to keep intact following a takeover.
Should the only remaining M&A strategy be a going-private by a Private Equity fund or existing shareholder Fairfax Financial, the layoffs were necessary now, since no PE buyer wants to make the first round of cuts post-acquisition if that can be avoided. The news, combined with the pre-announcement of a weak quarter, goodwill writeoff and cash drain, pushed BlackBerry shares down 20% — making any takeover that much cheaper than it was on Thursday.
The other benefit of the huge cuts is that it gives the negotiating team some credibility when it comes to working out an acceptable price with a potential buyer. Being able to look across the table and say the company is structured to survive as an independent company may now have some merit. When you are the seller and you appear to need a deal to survive, the price is always negatively affected. The buyer knows that time isn’t your friend, and will wait you out (see prior post “BlackBerry: don’t bet on a frothy, ‘quick auction’” Sept. 5-13). I’d be surprised if no one is interested in buying the patents or other parts of the business, at a price, and perhaps a multi-billion licencing deal is in the cards. But that kind of deal may not result in any premium to the current $9 share price.
For better or worse, BlackBerry shareholders need to prepare themselves for the day when the “For Sale” sign is taken down, this time formally, and they find themselves without a strategic takeover or settling for a meagre go-private deal. These cuts might well mean that BlackBerry is preparing for just that day. Why else would the Board buy a corporate airplane in July, only to turn around and sell it in September (H/T Will Connors at the WSJ)?