Learning from BlackBerry and Twitter

You may have read that BlackBerry’s recent takeover offer of $4.7 billion from its largest shareholder, Fairfax Financial Holdings of Toronto, collapsed on Nov. 4.

Only three years ago, the Canadian company known for manufacturing its line of smartphones and tablets commanded 43 percent of the market for personal and business usage. That figure has dwindled to just 3.8 percent in 2013. After cutting almost 40 percent of its staff following a $1 billion loss last quarter, the company signed a letter of intent to sell 90 percent of shares to Fairfax at $9 a share.

The company’s stock price peaked at $230.52 in July 2007. The stock is now — after the deal disintegrated — $6.49.

Once an innovative leader in its field, and the inventor of the QWERTY keyboard that was popular before touchscreen devices, BlackBerry appears to have been unprepared in forming an exit strategy. The CEO appointed in January 2012 to rejuvenate the company’s foothold in the market has stepped down. The company borrowed $1 billion from Fairfax and a group of institutional investors, to provide a cushion.

What can you learn from BlackBerry’s struggle? First, the importance of knowing your market value. BlackBerry apparently waited too long to recognize that the smartphone industry was changing, and its inflexibility to embrace shifting consumer desires led to its near elimination from the smartphone and tablet market. Second, it’s crucial to have an exit strategy that are you willing to go to before your company hits dire straits. BlackBerry could have sold before it saw the writing on the wall. By waiting too long to sell, BlackBerry’s valuation has plummeted.

Another extreme is an example of a company selling in its developmental stages before hitting full maturity is Twitter, which is reportedly valued around $30 billion today, having recently completed its initial stock offering.

The right exit strategy is to sell your company at or near the peak, before it starts trending down. The challenge of course is predicting when you will start to go down. If you have been growing year after year and you know that the reason for growth is going to continue, you can likely put off exit considerations. But if you are not sure whether you will grow this year, consider a valuation and exit strategy.

The lesson here is not to wait to sell. A smart businessperson takes advantage of an earn-out when selling to protect against undervaluation. The business could be sold at a price that is justified by its current valuation, but the business is guaranteed even more with carefully negotiated earn-out agreement for unrealized future potential.