Blackberry drops plan to sell itself

Blackberry announced Monday that it was abandoning plans to sell itself and it would replace CEO Thorsten Heins. The company decided instead to sell $1 billion in convertible debt to current shareholders and remain a public company.

Here’s the story from the Wall Street Journal:

After its months-long sale effort failed, BlackBerry Ltd. Monday abandoned a tentative $4.7 billion plan to go private and instead signaled its intention to continue as a public company with new leadership and a $1 billion investment from a group led by its major shareholder.

While the for-sale sign is down at least temporarily, there remain a host of questions about the future of the Canadian smartphone maker.

Sales of a new line of BlackBerry phones have flopped and the company is burning through its once-comfortable cash pile. Despite its efforts to trim costs by slashing jobs and writing down its inventory of unsold phones, some analysts said the company will need to make even more cuts to stay afloat during a transition period.

Investors also expressed skepticism about the company’s plans, sending the stock down 17% to $6.45 in recent trading in New York.

BlackBerry said it would sell $1 billion of convertible debt to Fairfax Financial Holdings Ltd. and other institutional investors.

The New York Times covered the leadership change, noting that Blackberry’s interim CEO is credited from saving another tech company from bankruptcy:

John S. Chen, the former chief executive of Sybase, will become BlackBerry’s executive chairman and acting chief executive.

Along with the cash infusion into BlackBerry, V. Prem Watsa, the chairman and chief executive of Fairfax, will return to the phone maker’s board. Mr. Watsa had resigned after the company announced that it was reviewing strategic options, including a sale, in the summer.

Mr. Heins, a former Siemens executive in Germany, became chief executive in January 2012 after James L. Balsillie and Mike Lazaridis, the longtime co-chairmen and co-chief executives, resigned in the face of a rapid decline in BlackBerry’s business and the failure of its PlayBook tablet computer.

Formerly the head of the company’s handset business, Mr. Heins heavily promoted the new line of BlackBerry 10 handsets as the company’s salvation. They proved, however, to be a commercial failure.

Mr. Chen led Sybase from 1998 until the company was acquired by SAP of Germany in 2010. He is widely credited with saving Sybase from bankruptcy. When he arrived, Sybase had lost much of its corporate database business to Oracle, IBM and Microsoft. Unprofitable, it had also developed a reputation for producing unreliable software.

After resolving the problems in Sybase’s traditional business, Mr. Chen expanded it into producing software for creating applications, mainly for businesses, for use on wireless mobile devices and to manage wireless networks.

The USA Today story pointed out that Chen’s appointment was a clear signal that Blackberry was still trying to move away from being primarily a device company:

“Putting a non-device person as an interim CEO is a clear sign that the devices business is not what matters anymore,” says Gartner analyst Carolina Milanesi. “The software and services (business) is where they have the assets and where they need to take the company.”

The announcement is the latest twist for the ailing smartphone maker as competitors such as Apple, Google and Samsung continue to dominate. After sales of its smartphones running its new BlackBerry 10 software failed to attract consumers, the company announced it was pursuing ‘strategic alternatives” for its business, including a possible sale.

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BlackBerry has a tough battle ahead as it attempts to regain footing in the smartphone market. The company reported a second quarter loss of $965 million, while Microsoft’s Windows Phone operating system has surpassed BlackBerry for third in market share, behind Apple iOS and Google Android.

Reuters offered these details about the convertible share sale:

“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”.

Fairfax has agreed to buy $250 million of the seven-year subordinated debentures, which will be convertible into common shares at $10 each. The private placement could eventually increase the number of BlackBerry shares by as much as 20 percent.

BlackBerry did not name the other institutional investors participating in the deal, but Chen said Silver Lake is not one of them.

“I know we have enough ingredients to build a long-term sustainable business,” he told Reuters. “I have done this before and seen the same movie before.”

BlackBerry had been talking with a number of companies, including Cisco Systems Inc, Google, SAP, Lenovo Group Ltd, Samsung Electronics Co Ltd, LG Electronics Inc and Intel Corp about selling parts or all of itself, Reuters reported previously.

But the only public offer came from Fairfax, which announced a tentative $9-a-share bid in late September. Reuters said on Friday that Fairfax was struggling to fund the $4.7 billion bid.

Moody’s said in September that that transaction would hurt Fairfax’s credit profile because it would convert a public equity investment into a private structure.

The current deal is structured to give Fairfax and the other investors flexibility as the financing is in the form of convertible debentures.

The investors have an option to buy up to an additional $250 million worth of debentures within 30 days following closing.

Investors obviously didn’t like the announcement since it does little to solve Blackberry’s problems or outline a clear strategy to do so. The cash infusion will likely be enough to get Chen in place, but whether it buys him enough time to actually make changes and capitalize on Blackberry’s extensive patents and other non-device businesses is anyone’s guess. Pulling back from a sale typically doesn’t help investors’ and analysts’ confidence in the board or the decisions.