By Jack Briody, Lorraine Jiang and Tristan Yang (Columbia University) 17/11/2018 |
Overview of the deal
Acquirer: BlackBerry Limited
Target: Cylance Inc.
Estimated value: $1.4bn
Announcement date: November 16, 2018
Acquirer Advisors: Perella Weinberg Partners LP
Target Advisors: Morgan Stanley, Jones Day
In a decision to burn through nearly two thirds of its cash balance, BlackBerry Limited recently announced an all-cash deal with Cylance Inc. This will be BlackBerry’s largest acquisition to-date, which, barring regulatory issues, is expected to close by February 2019. If successful, BlackBerry-Cylance will be yet another deal in the recent string of cybersecurity acquisitions such as Cisco-Duo ($2.4bn) and Thoma Bravo-Veracode ($950mm), representing the continuation of market consolidation.
In response to stiff competition with Apple and Android in the smartphone industry, BlackBerry decided to terminate in-house phone production in 2016. Growing at a rate of nearly 90% and bringing in over $100mm in 2017 revenue, Blackberry sees Cylance as the perfect opportunity to complete their move from phone production to security software. Going forward, Cylance will operate as a separate business within BlackBerry that will work in tandem with BlackBerry’s Unified Endpoint Management (UEM) and QNX units.
“Cylance’s leadership in artificial intelligence and cybersecurity will immediately complement our entire portfolio, UEM and QNX in particular. We are very excited to onboard their team and leverage our newly combined expertise...We believe adding Cylance’s capabilities to our trusted advantages in privacy, secure mobility, and embedded systems will make BlackBerry Spark indispensable to realizing the Enterprise of Things.” -John Chen, BlackBerry CEO
Company details (BlackBerry Limited)
BlackBerry Limited (BB), one of the top smartphone players prior to the iPhone boom, now focuses on security, efficiency, and management solutions within the Enterprise of Things (EoT). BlackBerry’s main product offerings include BlackBerry Enterprise Mobility Suite, Dynamics, and AtHoc.
- Founded in 1984, headquartered in Waterloo, Canada
- Executive Chairman and CEO: John Chen
- Number of employees: 4,044
- Market Cap: $4.86bn - EV: $3.33bn
- LTM Revenue: $882mm - LTM EBITDA: $63mm
- LTM EV/Revenue: 3.8x - LTM EV/EBITDA: 52.9x
Company details (Cylance Inc.)
In developing software that uses machine learning methods to solve cyber-security problems, Cylance Inc. has become a leader in the anti-virus space. Cylance’s contributions include CylancePROTECT, CylanceOPTICS, and CylanceV.
- Founded in 2012, headquartered in Irvine, California, USA
- Co-Founder, Chairman & CEO: Stuart McClure
- Number of employees: 868
- Market Cap: N/A - EV: N/A
- LTM Revenue: N/A - LTM EBITDA: N/A
- LTM EV/Revenue: N/A - LTM EV/EBITDA: N/A
Projections and assumptions
Interestingly enough, BlackBerry’s stock has only been trading about 1.7% higher than it was prior to the announcement, demonstrating a fairly limited investor response to the deal. On the one hand, this could be a reflection of the fact that investors believe that the deal success has a low probability. As will be discussed below, this is not likely, given that the risks and barriers associated with the deal are minimal. On the other, it is possible that BlackBerry is not on the average investor’s radar. Given that many people judge the success of a brand based on what they can see, it is safe to say that the disappearance of the BlackBerry from the smartphone scene could have influenced the public to perceive BlackBerry as a non-profitable firm/poor investment choice.
In first quarter fiscal year 2019, BlackBerry brought in $217mm in non-GAAP revenue, 89% of which was from software and services. After several successive years of booking revenue losses, analysts speculate that BlackBerry’s acquisition of Cylance could reverse the trend by year’s end 2019. A spike in BlackBerry’s EBITDA margin will be the main driver, with analyst estimates averaging a 7% increase to margins. Overall, BlackBerry’s short-term goal seems to be to fully commit to its transformation into a software company. Once the public realizes that such a change has been made, BlackBerry may be able to achieve revenue growth within the next year.
At an individual level, there is no shortage of privacy scares today: from Snapchat to Youtube, user data is continuously being collected. Building on the concept of the Internet of Things (IoT), the Enterprise of Things (EoT) speaks to the ways in which augmented interconnectivity can raise similar security concerns for businesses. While the Internet of Things broadens opportunities for contact with consumers, security issues related to data transmission pose a grave threat to enterprises in the status quo. KPMG estimates that 29% of cyber attacks result in the loss of revenue, and 50% of Global CEOs admit to being unprepared for such attacks. Further, according to Gartner, security concerns and privacy risks are the largest hurdles that stand in the way of the broader success of IoT.
As a result of the above industry changes, CEO John Chen has high hopes for the Cylance deal, as he claims that pairing Cylance with BlackBerry’s UEM and QNX units will allow BlackBerry to capitalize on heightened demand for safe endpoint transmission solutions in EoT contexts. Given that 10 million new “things” are activated every day, the hope would be for BlackBerry to step in and rectify the growing disparity between supply and demand for better IoT security over the next few years through use of Clyance’s threat protection expertise. QNX, which is a Unix-like operating system, can already be found in over 120mm automobiles; thus, Blackberry seeks to replicate their success in the auto space throughout the EoT.
Risks and uncertainties
Given that BlackBerry’s strategic rationale behind the acquisition is centered around their full-fledged entrance into the cybersecurity space, it is unlikely that the deal is held up due to regulatory concerns. In 2017, Cybersecurity Ventures estimated that by 2021 the cost of cyber threats to businesses could amount to $6 trillion. As a result, it is in the best interest of both firms and governing bodies for EoT-related security issues to be resolved as soon as possible.
But can BlackBerry afford this acquisition? Although the firm will still have around $864mm in cash and cash equivalents on their balance sheet post-acquisition, it is no secret that BlackBerry is not a cash machine. While CEO John Chen insists that they are paying a fair price for Cylance, it is still concerning that BlackBerry’s success is, to an extent, riding on this deal. In the abstract, it seems as if increases to BlackBerry’s margins are promising and have the potential to grow into the future as the firm continues its transformation from phone manufacturer to software vendor. However, Yoav Leitersdorf of YV Ventures, an expert in the endpoint security space, says that cybersecurity is saturated and spells disaster for the margins of a company like BlackBerry. If, however, BlackBerry is able to sustain itself on the $864mm cash-cushion mentioned above and surpass expectations by integrating Cylance into its business effectively, it may be able to make a name for itself as a top security software company for the EoT.
“‘The endpoint security space has become the most crowded in cybersecurity. Cylance has had a difficult time recently battling it out with CrowdStrike,’ wrote Leitersdorf, who said executives in the space consider CrowdStrike to be a superior product. George Kurtz, CEO and founder of CrowdStrike, a $3 billion company, is an advisor to YL Ventures. -Business Insider summarizes Yoav Leitersdorf
© The MergerSight Group. 2018. All rights reserved.