

Fairfax strikes $4.7-billion deal to buy BlackBerry - sbarre
http://www.theglobeandmail.com/report-on-business/fairfax-strikes-47-billion-deal-to-buy-blackberry/article14470689/

======
cs702
Fairfax Financial is run by Prem Watsa, a cautious, methodical, "value"
investor who has compounded Fairfax's book value by nearly 23%/year over the
past _27 years_.[1] (Fairfax's stock price has gained 19%/year over the same
three-decade period.) His approach and track record are similar to those of
Warren Buffett earlier in his career -- i.e., not someone one should normally
bet against.

If Fairfax is offering to pay $4.7 billion to acquire RIM, Mr. Watsa somehow
must have convinced himself that the value of RIM's business exceeds $4.7
billion by a large margin.

However, to me Blackberry looks like a dying platform suffering from _anti-
network effects_ (that is, fewer and fewer people use it, so fewer and fewer
people want or need to use it). I don't understand how he gets comfortable
with that number.

\--

[1] See page 8 of Fairfax's last annual letter to shareholders:
[http://www.fairfax.ca/files/Letter%20to%20Shareholders%20fro...](http://www.fairfax.ca/files/Letter%20to%20Shareholders%20from%20Annual%20Report%202012%20FINAL_v001_o7033s.pdf)

~~~
slykat
I'm a value investor myself and was seriously considering buying into this
stock if it dipped any further. The thesis for investment is pretty darn clear
at this point: _Blackberry is trading at levels significantly below asset
value and below the amount you 'd get from tearing down the company_

The balance sheet numbers per share: 1) +$13.50 - Net current assets (i.e
liquid assets) 2) +$2.50 - Real estate holding (less liquid) 3) +$6.50 - Book
value of IP 4) -$7.00 - TOTAL Liabilities

Meaning if you shut down the company you could realize a value of around $16
per share. Even if you discount current assets & IP since they might be over-
valued in the books you can realistically get to a $11-$14 range for the value
of the stock.

Essentially this means that any smart owner could realize a significant profit
at $9/share just tearing down the company smartly (i.e. not a fire sale). As
such, I expect Fairfax: 1) Maintain the businesses that are profitable TODAY
2) Shut down the unprofitable parts of the business that are destroying
earnings (and thus slowly eating into asset value and the investment thesis)
3) Shop out ownership / licensing of the IP given it's significant value

I don't think this means that Fairfax is trying to turn around the company and
restore Blackberry to its earlier glory; that would be a bit irresponsible and
reckless for a value investor. Don't expect Blackberry to be the same company
it was before, although I expect parts of business to continue.

~~~
cs702
slykat: I'm looking at asset liquidation value too, but my conclusions are
different from yours. According to the June 1, 2014 financial statements[1]:

* Cash, short-term and long-term liquid investments, receivables, and assets held for sale totaled $6.0 billion. (I wouldn't dare put a dollar value on inventories, because their value declines at an accelerating pace, like a waterfall, due to the rapid pace of technological change.)

* Property plant & equipment (consisting mostly of land and buildings) totals $2.2 billion. Let's give them full credit for this figure.

* Total liabilities are $3.7 billion.

So, assuming you can liquidate the whole business quickly, the liquidation
value of all tangible assets appears to be somewhere around $6.0 + $2.2 - $3.7
= $4.5 billion. However, the company is hemorrhaging money by the day and
suffering from _anti-network effects_ that can make revenues drop like a
waterfall (instead of declining in a gentle slope), so this estimate may be
optimistic. In a year, the figure could very well be down to $3.5 billion.

That leaves the value of intellectual property, carried on the books at $3.5
billion. Of that amount, $0.8 billion is the price paid for Blackberry's share
of the Nortel patents[2]; the reminder consists primarily of all the
Blackberry software they've developed in-house (that is, their proprietary OS
and applications, built on top of QNX), which is valuable to third parties
only to the extent they want to build a business around it. My (conservative)
guess: this is worth a LOT less than $3.5 billion -- maybe ~$1 billion -- but
I don't know for sure.[3]

At a proposed purchase price of $4.7 billion, the margin of safety looks very
slim to me.

\--

[1]
[http://ca.blackberry.com/content/dam/bbCompany/Desktop/Globa...](http://ca.blackberry.com/content/dam/bbCompany/Desktop/Global/PDF/Investors/Documents/2013/Q1FY14_final_filing.pdf)

[2] See the "Intangible Assets, Net" notes in
[http://press.blackberry.com/content/dam/rim/press/PDF/Financ...](http://press.blackberry.com/content/dam/rim/press/PDF/Financial/FY2013/Q4FY13_final_filing.pdf)

[3] For reference, QNX -- the jewel in Blackberry's software portfolio -- has
been sold twice over the past decade. Harman International bought it for $138
million in 1994, and then sold it to RIM for $200 million in 2010. These
figures are rounding errors compared to $4.7 billion. Source:
[http://blog.vdcresearch.com/embedded_sw/2010/04/update-2-rim...](http://blog.vdcresearch.com/embedded_sw/2010/04/update-2-rim-
to-acquire-qnx-terms-of-the-deal.html)

~~~
slykat
Glad to see someone actually looked into the balance sheet before discussing
valuation! To be fair I didn't do a detailed analysis into their books - I
just skimmed over their balance sheet.

Nevertheless here's where I think we disagree:

* Inventory will have some liquidation value. Let's discount inventory by 75% which is pretty conservative; you will still get $200M here

* IP - Main disagreement for me is here. Most analysts who have pegged the IP at $2 - $3 bn. Let's put it at $2bn, the lower end of the spectrum [1][2]

6.2 + 2.2 - 3.7 + 2 = $6.7B (~40% above purchase price)

As we can see the main question is the value of the IP (and PPE to a lesser
extent). I have absolutely no experience valuing patents, I'm not a patent
lawyer, and definitely won't be evaluating their 9K+ patent applications. So
unfortunately there's a pretty big unknown in the valuation.

Regardless we have a $4.7B - $6.7B range based on a very quick 15 minute
analysis of their balance sheet with an upside of earnings of any profitable
lines of business that can be operated independently (if they exist).

My guess is tha Prem Watsa, as former chairman of BBRY, has done a much more
rigorous evaluation of their IP and found profitable business lines he wants
to keep / spin-off to reach a comfortable margin of safety.

[1]
[http://money.cnn.com/2013/09/24/technology/enterprise/blackb...](http://money.cnn.com/2013/09/24/technology/enterprise/blackberry-
patents/)

[2] [http://blogs.wsj.com/corporate-
intelligence/2013/08/26/the-n...](http://blogs.wsj.com/corporate-
intelligence/2013/08/26/the-numbers-behind-blackberrys-patent-goldmine/)

~~~
cs702
slykat: thank you.

The value of IP isn't the only question. We also seem to disagree on how
quickly value is evaporating! Blackberry sales are bound to decline faster and
faster, like a waterfall -- similar to what happened to Nokia's smartphones.

After the introduction of iOS and Android in 2007-2008, Nokia's quarterly
smartphone unit sales barely budged... at first... but then dropped by two-
thirds between Q1 2010 and Q1 2012![1]

Liquidating a company of Blackberry's size would take _at least_ two years.
Any estimate of liquidation value should take into account the possibility of
quarterly unit sales dropping by two-thirds in the near future.

\--

[1] [http://www.dazeinfo.com/wp-
content/uploads/2012/04/post-15.b...](http://www.dazeinfo.com/wp-
content/uploads/2012/04/post-15.bmp)

------
JumpCrisscross
Fairfax Financial Holdings (TSX: FFH) is an $8.3 billion property and casualty
insurance company. They are an acquisitive bunch, having spent $4.7 billion on
deals since 2011 (37% of their enterprise value as of 30 June 2013 or 57% of
their market capitalisation as of today). _All_ their acquisitions since 1997
have been in the banking, insurance or shipping/transportation spaces, with
the exceptions of EFI Global (environmental services).

Their CEO, Prem Watsa, is a value investor. Fairfax's IRR is around 20% - this
means Blackberry needs to yield about $840 million in cash a year to tread
water. That seems unlikely. Instead, I think we will see a spin-off of the
handset business and patent portfolio with a retention of the cash-flow
generating service business.

What's the service business worth? It made $3.2 billion annualised the last
quarter (Q2 FY 2014), $3.9 billion in FY 2013, and $4.1 billion in FY 2012.
Let's assume it keeps declining at 8% a year. Let's further assume it can
return at least the entire company's FY 2013 40% gross margin. Guess what 40%
of $2.9 billion declining at 8% annually and discounted at 20% is worth over
the next 10 years? $4.7 billion. Thus, _if_ decline can be maintained at no
more than 8% while margins are maintained at 40% and the cost of capital
capped at 20%, the handset business, patent portfolio, and any terminal value
after 2023 are freebies.

------
chollida1
I worked at another Canadian company called Corel back in 2002 that went
through a similar takeover. Company with a large cash position relative to the
take over price, taken private by a Fund with the intention of being taken
public again in a few years after costs were under control.

If that experience was any indication of whats to come then life at BBRY is
about to become atlot less fun.

When a fund comes in they have a window for which they want to see a return(
ie go public again or sell). In such cases any expense that can't be directly
traced to adding to the bottom line will be mercilessly cut.

Good by Friday afternoon beers, employee sports teams, Christmas parties,
bonuses, T-Shirts, etc.

The MO for takeovers like this is similar to a house flipper, they aren't
looking to do the right thing for the long term, they'd rather do what can be
done to make things look good for the next 2-3 years.

They understand( or believe) that employees will stick around in the short
term( and put up with this stuff) if they believe an IPO is only a few years
away.

As someone who sits on the other side of the table now at a fund, I've seen it
happen from both sides now.

~~~
jonknee
> Good by Friday afternoon beers, employee sports teams, Christmas parties,
> bonuses, T-Shirts, etc.

Considering they lost $1,000,000 in the last 90 days I would assume it hasn't
been a very fun place to work at in a while. Maybe you could ask one of the
4,500 people they just laid off?

~~~
molecule
> Considering they lost $1,000,000 in the last 90 days...

$1,000,000,000

~~~
jonknee
Whoops. I knew it was a lot of zeros... $11,111,111 a day. Or $462,962 an hour
or $128 a second. That's a lot of cash.

------
antr
"Tentatively sold" is the worst description ever for what is really happening.

BB has just received an offer, the board has now approved this, but needs to
advise shareholders if this is a fair or not offer, dd is pending, and
shareholders have to decide yes/nor by tendering their shares... add to that
to the possibility of more offers being made, making this entire thing last
months (a la Dell et al).

Source: [http://press.blackberry.com/press/2013/blackberry-enters-
int...](http://press.blackberry.com/press/2013/blackberry-enters-into-letter-
of-intent-with-consortium-led-by-f.html)

~~~
3am
It should be noted Fairfax holds 10% of BBRY shares
([http://finance.yahoo.com/q/mh?s=BBRY](http://finance.yahoo.com/q/mh?s=BBRY)),
which means this to be taken a little more seriously than a 3rd party
unsolicited bid.

~~~
antr
I'm not saying otherwise, but a "letter of intent" has the same legality be it
from an existing shareholder or a non-current shareholder.

~~~
JumpCrisscross
Hmm, they could be fishing to help value their existing stake.

~~~
chollida1
That's a big gamble. The stock went from 8.60 to 9.20 on this news.

If this is a gamble and their bluff is called the stock is in for quite a
tumble.

This doesn't really fit the risk profile of FairFax capital.

------
mililani
Ugh. I know Fairfax VERY well. Prem Watsa is often called Warren Buffett of
the North, and he may very well be. He's a great investor, and has done VERY
well in investing the float of their insurance business. But, BUT, I think
he's way in over his head here. Buffett himself will not touch technology
companies, or businesses he doesn't understand. He has also said the
technology world is way too competitive, and that there is hardly a "moat"
that can protect a business from competition, etc... I don't understand why
Prem is going after Blackberry. It is clearly in one of the most competitive
spaces in technology, and there is no good crystal ball to see what the future
holds. I mean, for every Apple, there are lots of companies like US Robotics.

It is why I shy away from technology companies with my investments.

~~~
mhartl
To be fair, Watsa is a current RIM investor and a former board member. That
suggests he probably has a good idea of what he's getting into.

~~~
josefresco
OR.... he's biased into thinking RIM can "pull through" because of his
existing close relationship with the company.

------
runako
In context: Apple likely made more than $4.7B in revenue from its weekend
iPhone launch.

~~~
dubcanada
If you do the math assuming Apple make's $400 a phone which may or may not be
true, and the 9 million figure is correct. Then they made $3.6B however they
probably made another 1B from accessories, warranties, apps, etc. So yah they
probably did.

~~~
jonknee
The cheapest phone that launched was $549 so your estimate is wildly off base.
The average selling price was likely closer to $700.

~~~
mikeash
Does the carrier subsidy count up front, or does it trickle in over time?

Getting very tangential here, but that question occurred to me and I don't
know how it works.

~~~
jonknee
They account for it over time ("subscription accounting), but I believe get it
all at once. It's goofiness required for GAAP accounting IIRC. This is why
carriers often post lousy numbers after a big launch even though it means a
lot of future revenue--those $350 subsidies add up quickly.

~~~
mikeash
That's pretty wacky. So from an accounting perspective, the money just
_disappears_ for a while? If the phone companies have to post the loss
immediately but Apple posts the earnings over time....

Not saying you're wrong. The world of accounting is just odd sometimes.

~~~
jonknee
It doesn't disappear, it's noted, but just not counted as received. It is
wacky, but makes some amount of sense and makes revenue more even. It helps
lessen the incentive to stack a quarter with revenue even though it starves
the next quarter (someone else's problem).

It seems to relate with software updates being assumed:

[http://appleinsider.com/articles/09/10/21/inside_apples_ipho...](http://appleinsider.com/articles/09/10/21/inside_apples_iphone_subscription_accounting_changes)

> Based on research into what allowed this to happened, the Sarbanes-Oxley Act
> was instituted to require certain minimum standards of financial
> accountability. Among its many rules is a provision that states that
> companies can't immediately book revenue for a product if the complete
> product has not yet been fully delivered.

~~~
mikeash
Appreciate the info, always nice to learn new things.

------
mindstab
sooo... it seems partly for emotional reasons

“We’re trying to make sure it remains in whole in Canada"

that is not a business reason

"we have every confidence it will be successful again,”

based on?

"There are no strategic players, or other technology firms, in the
consortium."

so... a bunch of non technical players want to try and save a dying tech
company for emotional reasons?

unless I'm missing something it might seem like a good idea to run away from
that deal and fairfax at a pretty good speed.

i mean blackbeerry just announced hilarious losses for q2, dropped 4500 staff
and just announced "pulling out of the consumer market to focus on
enterprise"... it seems they are deeply failing to learn from the lessons of
the iphone 7 years ago now. they always were a more enterprise phone and that
was still not enough to save them from being cannibalized first from iphone
and now android. hell even now windows phones makes better sense because it
will tie in with your windows outlook, etc infrastructure better in your
standard microsoft office.

am I missing something? thoughts?

~~~
canistr
All they're really saying is that they want to maintain control without
outsiders. And to really do that, they have to convert the company back into a
private one, cut their losses by removing the deadweight in the 4500
employees, then stick to a core business that they know will keep them alive.

~~~
Mikeb85
They should do infrastructure, and high-end Android phones aimed squarely at
execs. Qnx is great, but the eco-system is in Android, BlackBerry should make
the switch.

Their hardware is great, they could bring their UI and apps with them, enter
Google's ecosystem and sell a bunch of gold-plated, physical keyboard equipped
Android phones...

~~~
nly
I think switching to Android would be a disaster. "Just another Android phone"
is something we see already in the market, with very few players actually
differentiating themselves.

------
lesbaker
Hopefully this means that BlackBerry will survive in some form and have a
future. Their recent phones and version 10 OS have a lot of merit, and I enjoy
using and developing for them.

------
lambersley
Its a(nother) sad day in tech-Canada. You don't have to like their products to
appreciate how they change the mobile landscape.

~~~
apetresc
This deal is not a death knell for BlackBerry by any stretch. I'm from
Waterloo and I can tell you that the general impression from the town and the
people working there is very positive – they're free from the pressures of
quarterly earnings calls to regroup.

This sale is not the end of BlackBerry.

~~~
sami36
"I'm from Waterloo and I can tell you that the general impression from the
town and the people working there is very positive"

If your definition of positive is the same condition that afflicts the posters
& commenters on Crackberry.com, I think a more appropriate word would be
"delusional." They've been positive & upbeat all along during BBRY's spiraling
death march.

With all due respect, I've yet to read ONE story out of Canada about
Blackberry that was not plagued by misplaced sentimentalism, or economic
nationalism. Just a couple days ago, I was mesmerized to watch a very somber
Peter Mansbridge interrogate his panel of journalists aboutwhat RIM's demise
meant for Canadian identity....crazy stuff.

~~~
apetresc
I'm referring specifically to the University and startup scene around here. If
anything, it's the opposite – they've been absolutely cynical the last few
years. I don't think you'll find a higher concentration of "rim job" jokes
anywhere than UWaterloo.

Don't get me wrong, we are _rooting_ for them. A lot of us bought stock years
ago and they're very generous with the city and University, but this is
basically the first perceived "good news" about RIM in years.

------
runarb
The bid is US$9 per share, but it traded at $10.50 around the announcement?[0]
Are they really going to get away with paying below last marked price...

0:
[https://www.google.com/finance?q=BlackBerry&ei=64NAUpDFA8OXw...](https://www.google.com/finance?q=BlackBerry&ei=64NAUpDFA8OXwQPsVQ)

~~~
chollida1
Well the announcement you are referring to is the layoffs and quarterly losses
and not the letter of intent.

This news solidified what the street thought about Blackberry's recent BB10
sales. Its sort of like saying this house was worth 1 million before the fire.
How can someone get away with paying on 300,000 for it now that its been
burned to the ground.

The answer is that given the new news( poor sales, layoffs, write downs of
inventory, etc) that BB is no longer worth 10.50/share.

So to answer you question, yes they probably will get that price.

------
yalogin
I really hope this is not a front for a patent troll. I know 4.7B is a lot for
a patent troll to spend but the most valuable assets BB holds right now are
its patents. A tech player is not going to (rather should not) buy BB because
a negative momentum is much more dangerous than a non-existent one.

~~~
3am
Google Fairfax and Prem Watsa. He is sort of like Canada's Warren Buffett and
a large existing BBRY shareholder. Not saying he won't monetize their IP
portfolio, but it's not a front for a patent troll.

------
canistr
Let's be clear, Fairfax 'buying' BlackBerry given Prem Watsa was on BB's board
is akin to saying Dell was 'sold' to Michael Dell.

------
mpg33
Irregardless of this deal...I'm still skeptical of where BlackBerry goes from
here. They said they are out of the consumer handset market yet the consumer
handsets were what gave BlackBerry those huge revenues/profits.

The corporate-only strategy I read about seems like if even successful would
be much smaller in scope. There seems to be no real idea of what BlackBerry
has to offer anymore??

------
steveplace
Back in 2012 I figured that the total value of cash + patents got us a share
price of around 8 bucks, so I guess that seems about right.

[http://investingwithoptions.com/blog/2012/05/03/rimm-
shake-s...](http://investingwithoptions.com/blog/2012/05/03/rimm-shake-shorts-
patent-portfolio/)

------
GavinAnderegg
I hope this works out well for everyone involved. I also hope that Fairfax
leaves Blackberry alone if the deal goes through. I say this judging ONLY by
the state of Fairfax's website:
[http://www.fairfax.ca/](http://www.fairfax.ca/)

------
xbeta
On a side story of the same article, I saw this : BlackBerry bought private
jet months before layoffs
[http://www.cnbc.com/id/101053908](http://www.cnbc.com/id/101053908)

~~~
curiousDog
From the article: "In light of the company's current business condition, the
company has decided to sell that aircraft along with the two legacy aircraft
and will no longer own any planes."

They probably bought it before this slump. Jets take months to deliver.

------
denzil_correa
The deal is not done as yet - there are "terms" to be discussed as well as 6
weeks of time. It only has a letter of intent from Fairfax in which
shareholders would receive $9 per share in cash.

------
lmg643
very interesting move. i currently have both a blackberry for personal and
work (yeah, one of those guys). i am converting the personal blackberry to an
iphone, and the work to the q10. the iphone arrives tomorrow. i've been
waiting a month for the q10. i still have high hopes for the q10 device but
the only thing i get out of blackberry is the keyboard, and cloud synching of
notes from the device on an enterprise account. i don't think it's enough.

------
Pxtl
Crap. I was hoping for an investor that actually had some kind of real plan,
some technical synergy they could offer... Facebook or Sony or Canonical or
something.

------
bond
Time to put Android on those phones...

------
xux
Just wondering, why would an Insurance company buy BlackBerry? What are they
planning to do with it?

~~~
bgilroy26
I started working at an insurance company (my second real job) 6 mos ago.
Insurance companies are banks but instead of getting money to invest from
depositors, it comes from businesses and individuals who hold policies.

A population of policy holders is predictable most of the time. You take the
money that you know you won't have to pay out and you invest it.

Warren Buffet's money comes from Geico etc. That's why they advertise so much.
The operations of Geico do not return fast enough to justify that marketing
spend. Warren Buffet's portfolio of businesses, on the other hand, return
handsomely.

A good sized fraction of the money of the people who see all those commercials
gets funneled directly into GEICO's float and increases Buffet's leverage.

------
gremlinsinc
why not use their resources to help build the new Ubuntu Mobile phone that was
on kick starter it would be a huge in demand project with a lot of
buzz...Ubuntu knows software blackberry hardware could be An interesting
marriage.

~~~
n2dasun
Similarly, a phone with a Blackberry-designed physical keyboard and [a
maintained] WebOS on it would keep me from ever choosing a new smartphone
again. I'd just keep buying the same phone over and over again, personally.

------
rdl
I hope this doesn't cause them to patent-troll with the Certicom ECC patents.

------
rocky1138
OK, let's start guessing who Fairfax is :)

~~~
chollida1
> OK, let's start guessing who Fairfax is :)

Why do we need to guess who they are?

They are a public company listed on teh TSX. Did we nee to guess who Google
was when they put in an offer for Motorola?

~~~
rocky1138
Sorry, I meant who is Fairfax representing?

"Fairfax Financial Holdings Ltd. has put together an equity consortium..."

"Fairfax’s equity partners want to remain anonymous until the due diligence is
completed."

