The sale of BlackBerry to its largest shareholder, Fairfax Financial Holdings Ltd., for $4.7 billion seems to be good news for the company. But can Fairfax, with its background in insurance really turn around the device making business?
BlackBerry said Monday that a letter of intent has been signed and its shareholders will receive $9 in cash for each share. Shares jumped from a low of $8.19 to $9.20 on the news, up 12.3 percent. It closed at $8.82.
Fairfax head Prem Watsa is a former board member who owns 10 percent of BlackBerry. Watsa stepped down when BlackBerry announced it was considering a sale last month. He stated his admiration for the company in the last letter to Fairfax shareholders.
“The BlackBerry brand name is perhaps one of the more recognizable brand names in the world and the company has 79 million subscribers worldwide,” he stated in his annual letters to shareholders in March. However, that was at a time when Fairfax’s position (around 10 percent before the announcement), was already under water. Fairfax started to accumulate a large amount of shares in 2011 when the stock was trading at $30.
Watsa is one of Canada’s best-known value investors and the billionaire founder of Fairfax Financial Holdings Ltd. He has been compared to Warren Buffett because of his investing approach. BlackBerry founder Mike Lazaridis recruited Watsa to join the company’s board in January 2012.
Analysts Doubt Strategy
Fairfax has seen a spectacular rise in the value of its assets since 1985, but investors will wonder what the company will do with a tech stock. So far, Fairfax, much like Buffett’s Berkshire Hathaway, has mostly made money by buying and selling insurance companies. The company therefore cannot contribute what BlackBerry needs most, a business infrastructure to make use of the valuable assets it still has left: Software and services, including the BlackBerry messenger.
“If you are trying the way to maximize the value of the company, this is not the way to do it,” says Edward Zabitsky, CEO of ACI Research, a Toronto-based financial research company.
“The future of the company is in software and services and they really didn’t give it the chance to get it off the ground. I am disappointed,” he adds.
He believes BlackBerry had the chance to get rid of the cash-burning hardware business and just focus on more lucrative parts of its business.
“They are finished as a hardware company, there would have been a $2 billion cost to exit that business.”
Instead, Prem Watsa and CEO Thorsten Heins have repeatedly stated their intention to continue making handsets.
“Thorsten hired a very capable management team and then focused on producing a high quality BB10—the next generation of BlackBerrys,” Watsa stated as late as March.
Missed the Boat
Trading of BlackBerry’s stock was halted ahead of the news. BlackBerry shares plunged after the company announced Friday a loss of nearly $1 billion and layoffs of 4,500 workers. The jump in the share price on Monday merely made up for lost ground after the bad earnings results.
BlackBerry once dominated the smartphone market, pioneering the use of mobile email with the introduction of the first BlackBerry in 1999—a two-way paging device—and later moving to global leadership with the introduction of integrated push email and phone services as well as text messaging in 2003.
Some 10 years later, the company is forced to go private, suffering from the legacy of its once groundbreaking QWERTY keyboard. Competitors such as Apple and Google have embraced the full touch technology from the beginning and analysts believe that BlackBerry held on to its keyboard for too long.
It only completed the transition in early 2013 with the new BlackBerry 10 model, which supports full touch, but so far hasn’t changed the company’s fortunes.
Fairfax Confident
Despite all the factors speaking against the transaction, Watsa is confident: “We believe this transaction will open an exciting new private chapter for BlackBerry, its customers, carriers, and employees,” Watsa stated. “We can deliver immediate value to shareholders, while we continue the execution of a long-term strategy in a private company.”
BlackBerry said its board of directors approved the terms of the letter of intent. The statement said BlackBerry and Fairfax will negotiate and execute a definitive transaction agreement by Nov. 4.
Watsa said in April that he’s a “big supporter” of current CEO Thorsten Heins and called his promotion the right decision in early 2012. He also said he’s excited about the company’s new BlackBerry 10 operating system.
At their peak of popularity in the fall of 2009, BlackBerry’s smartphones enjoyed a global market share of over 20 percent, said Mike Walkley, an analyst with Canaccord Genuity, an international investment bank. Its piece of the pie has since crumbled to just 1.5 percent.
BlackBerry, formerly known as RIM, was once Canada’s most valuable company with a market value of $83 billion in June 2008, but the stock has plummeted from over $140 per share to less than $9.
The Associated Press contributed to this report.
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