BlackBerry Ltd abandoned on Monday its plan to sell itself and said its CEO is stepping down, sparking a 16 per cent dive in its share price and raising fears the struggling smartphone maker is running out of options.
After a two-month review of strategic options and talks with potential buyers that included Facebook, Lenovo and private equity firms such as Cerberus, BlackBerry said it will abandon a sale. Instead, it will raise $1 billion by issuing convertible notes to a group of long-term investors including its largest shareholder, Fairfax Financial Holdings.
The only formal offer to buy BlackBerry – a tentative one – had come from Fairfax, which wanted to take the company private for $4.7 billion. But sources said Fairfax boss Prem Watsa had trouble financing the deal. Fairfax will now end up with $250 million of the debt offering.
BlackBerry shares closed 16 per cent lower at $6.50, giving the company a market value of about $3.38 billion, down from its boom-time peak of $80 billion.
“Now we’re back to the downward spiral,” said BGC Partners analyst Colin Gillis. “They’ve got $1 billion more cash that buys them time. The drumbeat of negativity is likely to continue.”
BlackBerry named John Chen, credited with turning around Sybase Inc in the late 1990s, as its interim CEO and executive chairman. Sybase, an enterprise software company, was eventually acquired by SAP AG in 2010.
Chen’s appointment was a surprise to investors as was the departure of current CEO Thorsten Heins, who will leave in about two weeks after the debt offering is completed. The company gave no reasons for the change.
BlackBerry, based in Waterloo, Ontario, pioneered on-the-go email, and for years its pagers and phones were must-have devices for political and business leaders. But it has bled market share to Apple Inc’s iPhone and devices that powered by Google Inc’s Android software.
In an interview with Reuters, Chen stressed his experience as a turnaround artist, and said he has no interest in shutting BlackBerry’s loss-making handset business.
“I’m doing this for the long term. I’m going to rebuild this company,” said Chen, who said it would take six quarters to turn BlackBerry around. “I know we have enough ingredients to build a long-term sustainable business. I’ve done this before and seen the same movie before.”
Chen, who joined private equity group Silver Lake as senior adviser a year ago, said his involvement with BlackBerry has nothing to do with his ties to Silver Lake, which partnered with Michael Dell recently to take computer-maker Dell Inc private.
“Fairfax’s investment will buy the company some time, which it badly needs, but the company needs a new strategy more than ever,” said Jan Dawson, Ovum’s chief telecoms analyst, noting that communication on the strategy must start “very soon”.
BlackBerry said Watsa, who stepped down pending BlackBerry’s strategic review, is rejoining its board as lead director and chair of its compensation, nomination and governance committee. Chen replaces Barbara Stymiest, as chair of BlackBerry’s board, while Heins and David Kerr are also stepping down.
Heins has been BlackBerry CEO for less than two years. In April 2013, the board agreed to a new pay deal that included generous payments if Heins lost his job due to a change in control, or if he was terminated without cause, including two years’ salary and a variety of other incentive payments.
Fairfax still on board
In BlackBerry’s new debt deal, the seven-year subordinated debentures will be convertible into common shares at $10 each. The private placement could eventually increase the number of BlackBerry shares by almost 20 per cent.
BlackBerry did not name the other investors in the deal, but Watsa said Silver Lake is not one of them.
BlackBerry had been talking with a wide range of companies, including Cisco Systems Inc, Google, SAP, Lenovo Group Ltd, Samsung Electronics, LG Electronics Inc and Intel Corp, about selling parts or all of itself, Reuters has reported.
Since BlackBerry thus far carries no debt, analysts noted that the financing deal puts Fairfax in a strong position even if the turnaround plan fails and BlackBerry is forced to seek creditor protection. Debt holders take precedence over equity investors in such cases, giving Fairfax a bigger say in the company’s ultimate fate.
“We did the due diligence … and our conclusion was that a leveraged buyout with high-yield debt and at high interest rates was not appropriate for this company,” Watsa told Reuters in an interview on Monday. “So we came out with the convertible debenture deal that we saw as more appropriate.”
The investors have an option to buy up to an additional $250 million worth of debentures within 30 days after closing.
BlackBerry had about $2.6 billion in cash and investments, as of the end of its fiscal second-quarter, down from some $3.1 billion at the end of the previous quarter.
Despite the new financing deal challenges remain, including a declining subscriber base, falling shipments, the defection of clients that use its enterprise servers and a loss of market share, analysts say.
“Investors should expect very poor operating results in the coming quarters,” warned National Bank analyst Kris Thompson, who slashed his BlackBerry price target to $3 from $9.
New BlackBerry boss John Chen out to prove skeptics wrong
John Chen, the man charged with breathing life into struggling BlackBerry Ltd , says he has no intention of killing the money-losing BlackBerry handset as he looks to turn around the smartphone maker.
“I know we have enough ingredients to build a long-term sustainable business,” Chen said in a telephone interview with Reuters. “I have done this before and seen the same movie before.”
Where Chen did it before, most famously, was as CEO of Sybase, a maker of computer database software that was losing money and in crisis after having to restate its results as he took the helm in 1998.
Sybase then was in a position similar to BlackBerry’s now: it had very little credibility with Wall Street, posting a 1998 operating loss of $98 million. In 2010 he sold it to SAP for $5.8 billion.
Chen, an energetic 58-year-old Hong Kong native, who immigrated to the United States in 1973, was named executive chairman and interim chief executive of Blackberry on Monday as the company unexpectedly abandoned a plan to sell itself.
In a brief telephone interview, he vowed to rebuild the Canadian firm’s once booming handset business, whose sales have plummeted as consumers, corporations and even government agencies, once its most loyal customers, have switched to devices running on the Google Inc’s Android and Apple Inc’s iOS operating systems.
The company has not disclosed how long Chen has been working with BlackBerry.
He declined in the interview to provide much detail about his strategy for reviving the company, but the executive, who sits on the boards of Walt Disney Co and Wells Fargo & Co, estimated the turnaround will take about six quarters.
Work cut out for him
He also said his work at BlackBerry will “have nothing to do” with his role at private equity firm Silver Lake, where he serves as a senior adviser.
Early plans include meeting with government customers as well as those in the financial and telecommunications sectors in North America and Europe in an effort to “stabilize” those relationships. He also vowed to bring in new executives.
Chen has his work cut out for him in terms of customers as well as investors. The stock plunged 16 per cent in Nasdaq trade on Monday on disappointment that the company will not be sold and on doubts that Chen can deliver.
Back in January 2012, when departing CEO Thorsten Heins was brought in to run BlackBerry, he made promises that were similar to the ones that Chen made on Monday.
At Sybase, Chen slashed expenses and began focusing on pursuing niche segments of the database market rather than competing with bigger software makers Oracle Corp and IBM across all segments of the mammoth industry. The company returned to profitability within a year.
He gradually won over customers who were considering switching to other software providers because they feared Sybase might not be in business much longer.
“The first thing he did coming on board was to gain trust with customers and calm them down,” said Willie Jow, a friend of Chen’s and long-time Sybase executive who remained with the company after it was sold to SAP. “Everybody was staying ‘Why should I stay with you? Why shouldn’t I leave right away?’ He answered the tough questions one by one.”
Chen is known to be a straight shooter who does not have patience for finger-pointing or complaining about something without suggesting what he feels is a legitimate proposal for fixing it.
One former employee says that Chen got riled up when a manager suggested changing the name of a product to boost lackluster sales. He responded by asking if it would also make sense to change the names of your children if they got bad grades in school.
Chen, who came to the United States at age 17 to study at a boarding school, says he is not daunted by the skepticism about BlackBerry’s ability to bounce back from its myriad problems.
“There is a lot to do,” he said in the interview. “There are a lot of challenges or otherwise I would not be interested.”