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.
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.
Take it private, do another, more aggressive round of layoffs and get down to a very core group. Then decide whether to chop it up and sell it off (patents alone are probably worth a good chunk of money). As far as I know, Blackberry has no debt, so that makes the math a bit easier.
This might be where his knowledge of the company comes from:
"On January 22, 2012, it was reported he was to be appointed to BlackBerry handset maker, Research In Motion Ltd. (RIM), board of directors in the company's largest ever corporate shakeup. Mr Watsa resigned in August 2013, but kept his investment in the company at the time."
At the end of the last quarter, the company's book value was $9.4 billion. Even if you leave out intangibles (like patents, which everyone seems to agree is worth something), the value was $5.9 billion. I think the value proposition is easy to see. Heck, current assets minus all liabilities was $3.4 billion which means that they are valuing the patents and buildings at about $1.3 billion (perhaps a bit more if you factor in this quarter's losses). It might be better for shareholders to wind the company down, and pay out the cash as dividends.
Value investors don't share the founder's shame in riding the revenues of the installed base. Many software firms find home with private equity firms that are happy to cut R&D and Marketing, and live off of services revenue. I could see Blackberry going down this path.
What has not been mentioned how curious the timing of this offer has been.
BBRY just did a massive writedown basically valuing all their newest phone inventory at $0. BBRY also changed the way they record sales so it looks like they have a bigger sales drop than they really did(they still had a very bad drop).
To have all these bad news and then for Watsa make what is effectively an insider bid for a company after participating in such negative news(resigning from the BBRY board a few weeks earlier does not count), smacks of something "unethical".
Why didn't he make a $12 bid a few days earlier? It is obvious Watsa knew the bad news and could make an informed bid.
A lot of regular investors are feeling extremely hurt by this. If I had invested in BBRY at say $10 hoping for a longer term turnaround, I would be upset as well.
To a regular investor it looks like the big boys not playing fair. Not that life is fair or anything.
Could the anti-network effect be addressed by targeting niche markets? A renewed focus on Enterprise, for example, or a marketing strategy that paints them as a "premium" consumer choice.
They have a lot of cash, no debt. Qnx finally has a beautifull gui. Still have contracts with chrysler group. Bunch of buildings, patents, and huge upside. If they can license Nokia maps, now that Nokia HW is out of the picture, bb10 will have satisfied my last complaint.
Probably through patents. Sell those to highest bidding troll, then layoff to a very small core of the remaining interesting engineers with a brain and sell those to Google or Microsoft as an aquihire.
Fairfax first invested in RIM back in 2010 and they've been adding to that position ever since. Their 10% stake was purchased at an average price of $17. He's been in the red on this investment for a while. I think this purchase is more about trying to turn the company around and try to recoup whatever they can. What JonFish85 posted is probably what's going to happen here.
> Take it private, do another, more aggressive round of layoffs and get down to a very core group. Then decide whether to chop it up and sell it off (patents alone are probably worth a good chunk of money). As far as I know, Blackberry has no debt, so that makes the math a bit easier.
Watsa is a great investor with a solid track record, but I think this has been a mistake for him.
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.
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.
> 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?
"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).
It should be noted Fairfax holds 10% of BBRY shares (http://finance.yahoo.com/q/mh?s=BBRY), which means this to be taken a little more seriously than a 3rd party unsolicited bid.
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.
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.
“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.
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.
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.
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...
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.
It was selling for $8.26 this morning--the drop you're seeing is from last week after they announced they lost $1,000,000 over the previous 90 days and were laying off 4,500 people. The buyout announcement is what provided the small boost this afternoon.
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.
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??
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/
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.
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.
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.
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.
[+] [-] cs702|12 years ago|reply
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...
[+] [-] slykat|12 years ago|reply
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.
[+] [-] JonFish85|12 years ago|reply
[+] [-] hbbio|12 years ago|reply
"On January 22, 2012, it was reported he was to be appointed to BlackBerry handset maker, Research In Motion Ltd. (RIM), board of directors in the company's largest ever corporate shakeup. Mr Watsa resigned in August 2013, but kept his investment in the company at the time."
Source Wikipedia: http://en.wikipedia.org/wiki/Prem_Watsa
[+] [-] goodcanadian|12 years ago|reply
[+] [-] mathattack|12 years ago|reply
[+] [-] sireat|12 years ago|reply
BBRY just did a massive writedown basically valuing all their newest phone inventory at $0. BBRY also changed the way they record sales so it looks like they have a bigger sales drop than they really did(they still had a very bad drop).
To have all these bad news and then for Watsa make what is effectively an insider bid for a company after participating in such negative news(resigning from the BBRY board a few weeks earlier does not count), smacks of something "unethical".
Why didn't he make a $12 bid a few days earlier? It is obvious Watsa knew the bad news and could make an informed bid.
A lot of regular investors are feeling extremely hurt by this. If I had invested in BBRY at say $10 hoping for a longer term turnaround, I would be upset as well.
To a regular investor it looks like the big boys not playing fair. Not that life is fair or anything.
[+] [-] Zikes|12 years ago|reply
[+] [-] jrn|12 years ago|reply
[+] [-] jpswade|12 years ago|reply
This seems like your textbook acquire, split and sell.
[+] [-] outside1234|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] dirkdk|12 years ago|reply
[+] [-] cremnob|12 years ago|reply
> Take it private, do another, more aggressive round of layoffs and get down to a very core group. Then decide whether to chop it up and sell it off (patents alone are probably worth a good chunk of money). As far as I know, Blackberry has no debt, so that makes the math a bit easier.
Watsa is a great investor with a solid track record, but I think this has been a mistake for him.
[+] [-] rorrr2|12 years ago|reply
[+] [-] JumpCrisscross|12 years ago|reply
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|12 years ago|reply
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|12 years ago|reply
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?
[+] [-] antr|12 years ago|reply
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...
[+] [-] 3am|12 years ago|reply
[+] [-] mililani|12 years ago|reply
It is why I shy away from technology companies with my investments.
[+] [-] mhartl|12 years ago|reply
[+] [-] Mikeb85|12 years ago|reply
Edit - I've also done well trading BYD :-)
[+] [-] runako|12 years ago|reply
[+] [-] dubcanada|12 years ago|reply
[+] [-] chancancode|12 years ago|reply
[1] http://www.zdnet.com/blog/btl/googles-motorola-acquisition-n...
[+] [-] jamespo|12 years ago|reply
[+] [-] edwinnathaniel|12 years ago|reply
http://www.apple.com/ios/whats-new/
[+] [-] bthomas|12 years ago|reply
[+] [-] mindstab|12 years ago|reply
“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?
[+] [-] lesbaker|12 years ago|reply
[+] [-] lambersley|12 years ago|reply
[+] [-] apetresc|12 years ago|reply
This sale is not the end of BlackBerry.
[+] [-] runarb|12 years ago|reply
0: https://www.google.com/finance?q=BlackBerry&ei=64NAUpDFA8OXw...
[+] [-] chollida1|12 years ago|reply
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.
[+] [-] jonknee|12 years ago|reply
[+] [-] unknown|12 years ago|reply
[deleted]
[+] [-] yalogin|12 years ago|reply
[+] [-] canistr|12 years ago|reply
[+] [-] mpg33|12 years ago|reply
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|12 years ago|reply
http://investingwithoptions.com/blog/2012/05/03/rimm-shake-s...
[+] [-] GavinAnderegg|12 years ago|reply
[+] [-] xbeta|12 years ago|reply
[+] [-] curiousDog|12 years ago|reply
They probably bought it before this slump. Jets take months to deliver.
[+] [-] denzil_correa|12 years ago|reply
[+] [-] lmg643|12 years ago|reply
[+] [-] Pxtl|12 years ago|reply
[+] [-] bond|12 years ago|reply