How BlackBerry Handled Past Wealth: As the company’s fortunes spiral down, a look back shows little reward for loyal shareholders even in its heyday. But executives did well

August 22, 2013

How BlackBerry Handled Past Wealth



It started in an unlikely place, far from the headquarters of more established technology companies, and grew to become a dominant player. Along the way, investors piled in, undeterred by the company’s policy of never paying a dividend. But then the technology changed, and the company struggled to keep up. Eventually it realized it could not continue as it was. It was broken up and acquired, with investors receiving a fraction of what their shares had been worth at the peak.That was the story of the Digital Equipment Corporation, which was based in a former textile mill in Maynard, Mass., and became the second-largest computer company in the world in the 1980s. In 1998, it was acquired by Compaq, a maker of personal computers that had destroyed Digital’s business in mini computers. It proved to be a poor deal for Compaq, which itself was acquired later by Hewlett-Packard.

A year before Digital was acquired, a small mobile technology company based in Waterloo, Ontario, went public on the Canadian market. In 1999, it listed on Nasdaq and became a phenomenon. It was called Research in Motion until this year, when its corporate name was changed to that of its primary product, BlackBerry.

Now it seems as if BlackBerry will follow the Digital Equipment path. It has hired bankers to pursue its “strategic options,” and the expectation is that it will be acquired for its cash and patents while the product that made it rich and famous will gradually vanish.

Digital left behind a large number of technology companies in Massachusetts, some of which flourished in the very mill that Digital made famous. BlackBerry’s impact on Waterloo seems likely to be similar.

This column is not about the changing technology that caused the decline of BlackBerry, which by now is well known. Instead, it is about the way the company handled prosperity when profits were plentiful — a way that served BlackBerry executives well and that pleased Wall Street but provided no benefits to loyal shareholders.

BlackBerry’s corporate filings show that over the years it distributed $3.5 billion to shareholders. (Although BlackBerry is based in Canada, it keeps its books in United States dollars and that number, like all others in this column, is in United States currency.) That is an impressive amount, especially considering that the entire company is now worth only a little more than $5 billion.

But loyal shareholders did not receive any of that money. To get the money, an investor had to sell. The money was spent on share buybacks, and most of those buybacks came in 2008 and 2009, when the company was flying high.

BlackBerry’s financial strategy was not particularly unusual, although it does stand out in the way it abused the rules on executive stock options. Perhaps it would never have paid dividends anyway, but those options gave the company’s executives good reasons to avoid dividends and concentrate on share buybacks.

The result was a classic “sell low and buy high” strategy, one that did wonders for the executives.

Over the years, BlackBerry executives and employees exercised options to acquire 83.3 million shares, adjusted for two stock splits. On average, they paid $4.38 a share.

Those prices were, of course, well below the market value of the shares at the time. That is the way options work — or at least are supposed to work. The exercise price is equal to the market price when the options are issued, but the executive has up to 10 years to exercise them, and will do so only if the price has increased.

One reason companies that issue a lot of options prefer stock buybacks to dividends is that while buybacks may raise the market value of the stock and thus increase the value of an outstanding option, dividends are less likely to do so. Option holders, unlike shareholders, do not benefit from dividends.

Corporate managements like to say that options do not dilute shareholders’ stakes because the company acquires and retires an offsetting number of shares. BlackBerry did just that, buying 85.5 million shares that it canceled. It bought an additional 12.3 million shares that it did not cancel but held to provide stock to issue directly to executives.

Over all, it paid an average of $36.10 for the shares it repurchased.

The net effect: It took in $365 million from the exercise of options. It paid $3.5 billion to repurchase shares. Under accounting rules, that $3 billion difference had no effect on reported profits, but it had a big effect on the resources available to the company for other purposes, like spending on research and development.

The incentive effects of option grants, as opposed to grants of actual shares, have long been debated. Options offer the possibility of large profits if the share price goes up, but might also expire, worthless, if the stock does not rise. Some critics argue that options may encourage executives to gamble with the company’s assets because they will lose no more if the company’s share price collapses than they would lose if it remained flat.

Restricted stock grants, on the other hand, have less upside. They also have a continuing downside, because an executive holding such shares will stand to lose money as the stock price declines, even if it is already worth less than when it was issued. Some argue that does a better job of aligning executive interests with those of shareholders.

In practice, companies tend to prefer options when they think the share price will rise, and restricted stock when they are not so confident.

That is the way it worked at BlackBerry. The last large option grants to senior executives were made in October 2007. A year later, the stock price had peaked — at $148 in June 2008 — and was down to about $70. No options were granted. Instead, restricted stock units were issued.

It may be that was coincidental. By then, BlackBerry and its top executives were up to their necks in investigations into the company’s options practices. The company eventually admitted that ever since 1998 — the year after it went public — the company’s top executives had been routinely backdating options to get exercise prices as low as possible and had lied about the practice to, among others, its auditors.

In 2006, when the backdating scandal broke in the United States, the company piously denied it had done anything of the sort. A few months later, it had to admit it had lied. In the end, top executives surrendered a large number of options, and other options were re-priced. The Securities and Exchange Commission determined that more than 1,400 individual grants had been backdated.

At least the executives were not doing that only for themselves. They also did it for new employees and others receiving grants. They seem to have done all they could to help out everyone involved.

Except, of course, the shareholders.

Any shareholder could have sold shares back when the company was buying, and no doubt many did. But the nature of stock options is that most, if not all, of the shares acquired when options are exercised are immediately sold. The executives certainly benefited from the purchases. Shareholders who believed in the company’s future did not.

BlackBerry shares now trade around $10, up from around $9 before the company indicated it was looking for a buyer. While that price is way below the peak, it still represents a nice profit for any investor who bought when the company went public in 1997, although it is below the price paid when the company sold stock to the public in 2004.

In BlackBerry’s defense, the buyback strategy was being recommended by most Wall Street firms for years, and the company, whose spokesman did not return a phone call seeking comment, no doubt received that advice from experts. And there is evidence that BlackBerry was particularly vulnerable to Wall Street wisdom. Before the credit crisis erupted, it had put cash into “safe” Wall Street recommendations like structured investment vehicles and auction-rate securities. It took losses on them, as well as on money that Lehman Brothers owed it when it collapsed.

None of this explains BlackBerry’s fatal error, of not managing to be the company that figured out where technology was going. But it does explain why shareholders who believed in the company when times were good did not prosper as they might have

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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