Blackberry (BBRY)’s search for strategic alternatives

a 6-K

Yesterday BBRY filed a 6-K (it’s a foreign–i.e., Canadian–company, hence it’s a 6-K, not an 8-K) with the SEC, which consists of the press release it issued at the same time.

In it, BBRY (BB for you Toronto Stock Exchange fans) says it’s setting up a committee to explore strategic alternatives, which the firm defines as “possible joint ventures, strategic partnerships or alliances, a sale of the Company or other possible transactions,”

BBRY also says the board member, Prem Watsa, CEO of BBRY’s largest shareholder, investment firm Fairfax Financial, has resigned from the board citing “potential conflicts” that may arise as the committee does its work.

What’s going on?

It seems to me that BBRY effectively hung a “For Sale” sign around its neck in March 2012–and has had no takers.  So the announcement appears to mean–and is being widely taken on Wall Street as meaning–that BBRY is getting ready to go private.  Mr. Watsa’s resignation from the board suggests his firm will want to be part of the private ownership group.

Why go private?  

Why can’t BBRY do what’s necessary while retaining its listing?  It’s all about financing.

1,  For one thing, it’s better to have no price than a low price.

BBRY may need radical surgery to survive.  Contrary to the picture presented in finance textbooks, Wall Streeters aren’t steely eyed rational thinkers.  The sight of blood and body parts on the operating table makes them woozy.  During restructuring, the stock price might decline–sharply, very sharply.  Professional short-sellers, whose job is to kick a fellow while he’s down, would certainly help push the price down.

The low price–let’s say $1 a share vs. about $11 now–has several bad consequences.

–It scares the wits out of potential sources of finance, either the junk bond market or commercial banks, who would take the same factual situation much more calmly if there were no plunging price chart.  This effectively cuts off liquidity, just as the firm needs it the most.

–The price could get low enough that the stock is delisted, another unnecessary black eye.

–Worst of all for shareholders, a stock that’s unattractive to acquirers at $11 may become irresistible at $2.  Shareholders might jump all over a takeover bid at $4–in effect “stealing” the patient right out of the recovery room.

2.  Look at DELL.  Silver Lake has lots of experience in turning around tech companies.  Its price?  …ownership of the company, i.e., the lion’s share of the profits from doing so.  That’s just the way it is.

3.  One of the ugly secrets of private equity is this:  sometimes, when the private equity owners sense the ship is sinking despite their best efforts, they make a large junk bond offering and pay out some or all of the proceeds as a dividend to themselves.  Their risk is lessened by the return of capital; that of the offering company is increased.  This maneuver would be impossible to accomplish with a publicly listed company.

4.  Yes, going private frees management from SEC-mandated financial disclosure and from the need to do extensive investor/press relations.  But I think this is a minor benefit in comparison with either #1, #2 or #3.