Suit alleges company misled investors on financial strength; CEO Heins, CFO Bidulka also named as defendants; Company accepted $4.7bn tentative offer from Fairfax Financial
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A shareholder of BlackBerry Ltd has sued the company and its executives, accusing them of inflating the stock price by painting a misleadingly rosy picture of the business prospects of its BlackBerry 10 smartphone line.
Waterloo, Ontario-based BlackBerry, formerly Research In Motion Ltd, misled investors last year by saying that the company was “progressing on its financial and operational commitments,” and that previews of its BlackBerry 10 platform were well received by developers, according to shareholder Marvin Pearlstein in a lawsuit lodged in Manhattan federal court.
Pearlstein is seeking to represent a class of “thousands” of shareholders who bought stock between September 27, 2012, when the company touted its strong financial position, and September 20 of this year, when it revealed it would have to write down between $930mn and $960mn related to unsold BlackBerry 10 devices, according to the lawsuit.
“In reality, the BlackBerry 10 was not well-received by the market, and the company was forced to ... lay off approximately 4,500 employees, totalling approximately 40% of its total workforce,” the complaint alleges.
In addition to BlackBerry, chief executive Thorsten Heins and chief financial officer Brian Bidulka are named as defendants. A spokeswoman for BlackBerry declined to comment.
BlackBerry put itself on the block in August after bleeding market share to other smartphone makers over the past few years, namely Apple Inc and Google Inc. It accepted a tentative offer of $4.7bn from Fairfax Financial Holdings last month.
Several sources close to the matter told Reuters the company is in talks with Cisco Systems, Google and SAP about selling all or part of itself. BlackBerry has also asked for preliminary expressions of interest from Intel Corp and Asian companies LG and Samsung by early next week. Cerberus Capital Management was reported to have expressed such interest on Wednesday.
Such a deal would be an alternative to the preliminary agreement reached weeks ago with a group, led by BlackBerry’s biggest shareholder, Fairfax Financial Holdings, to take the company private for about $4.7bn, a bid which has faced some scepticism because of financing questions.
It is unclear which parties will bid, if any. But the potential technology buyers have been especially interested in BlackBerry’s secure server network and patent portfolio, although doubts about the assets’ value remain an issue, the sources said.
Possible bidders are proceeding with caution given the uncertainty around BlackBerry, which last month reported a quarterly loss of nearly $1bn after taking a writedown on unsold Z10 phones.
The value of BlackBerry’s patent portfolio and licensing agreements is likely to halve in the next 18 months, a company filing from this week shows, potentially limiting its attractiveness.
According to analysts, BlackBerry’s assets include a shrinking yet well-regarded services business that powers its security-focused messaging system, worth $3bn to $4.5bn; a collection of patents that could be worth $2bn to $3bn; and $3.1bn in cash and investments.
Adding to the company’s woes, it’s likely to burn through almost $2bn of its cash pile in the next year and a half, Bernstein analyst Pierre Ferragu wrote on Thursday after studying the filing.
Private equity firms that have showed interest in BlackBerry — which also include Cerberus Capital Management — have asked the company and its advisers to provide additional financial details about its various business segments, two of the sources said. That process could take another few weeks, as BlackBerry focuses on taking bids from industry peers, the sources said.
In August, the company said it was weighing its options, which could include an outright sale, after Reuters first reported BlackBerry’s board was warming up to the possibility of going private.
At that time, it formed a five-member special committee chaired by board director Timothy Dattels. Other members include chairman Barbara Stymiest, CEO Heins, Richard Lynch and Bert Nordberg.
A spokesman for BlackBerry said in an emailed statement to Reuters: “The special committee, with the assistance of BlackBerry’s independent financial and legal advisors, is conducting a robust and thorough review of strategic alternatives.” He declined to provide further comment.
JP Morgan Chase and RBC Capital Markets are advising BlackBerry. The board is being advised by Perella Weinberg Partners, the sources said. Skadden, Arps, Slate, Meagher & Flom and Torys are providing legal advice.
According to the lawsuit, the write-down announced on September 20 sent stocks reeling, with share price dropping 24%, from $10.52 on September 19 to $8.01 on September 25. The 35-page complaint asserts two violations of the Securities and Exchange Act of 1934.
It is not the first time BlackBerry has been in trouble with investors. A judge threw out a 2011 lawsuit by a proposed class of stockholders who said the company misled them about the prospects of its then-new line of tablet and other products. The plaintiffs in that case have appealed the decision.