Fairfax Financial Holdings’ US$4.7-billion bid for BlackBerry Ltd. prompts many questions, but the main one is this: What does Prem Watsa know about BlackBerry that the rest of us don’t? Watsa, the CEO of Fairfax, made his reputation as a value investor. He seeks out companies that have been written off by investors at large, on the belief these companies will recover. He’s had a lot of success in this regard, but Watsa does not have a spotless track record. In taking on BlackBerry, he’s setting himself up for either the greatest victory or biggest mistake of his career.
Fairfax is leading a consortium of investors (the other members were anonymous at press time) to take BlackBerry private. The group has the next six weeks to conduct due diligence, and BlackBerry is free to entertain other offers. The low purchase price (at $9 per share, it’s only a 3% premium on the previous trading day’s closing price) means it’s not inconceivable another bidder could emerge.
The company began establishing what eventually became a 10% stake in BlackBerry in 2011. But BlackBerry has since lost millions of subscribers, and its market share has dwindled to less than 3% globally. Its new line of smartphones fell flat, and earlier this month the company announced 4,500 job cuts and a nearly $1-billion writedown on unsold inventory. If ever there was an unloved company for Watsa to get involved with, it’s BlackBerry.
The danger for Watsa is that he’s falling into a value trap. That’s when a company appears to be merely undervalued but really is in a death spiral. And Watsa has been there before. In the late 1990s, Fairfax bought a pair of U.S. insurance companies, spending nearly $1.5 billion. The deals were expensive, and contributed to Fairfax posting its first ever loss in 2001. One of the insurers, TIG Holdings, was in worse shape than originally thought. The company spent years integrating the profitable portions of the business and shedding other assets. Fairfax also bet on Canwest Global Communications, which ended up filing for creditor protection, and it wrote down its investment in Torstar Corp. In 2010, Watsa admitted to getting “burned” on media plays.
Watsa’s comments on BlackBerry since the offer suggest he would prefer to keep the company more or less intact and focus on business customers, echoing an announcement from BlackBerry CEO Thorsten Heins earlier in September. “We think over time [BlackBerry] can be successful again,” Watsa told the Wall Street Journal after the proposed deal was announced. Still, a new owner and a revised game plan might not change much. “BlackBerry is still facing Apple, Samsung, and other top players for enterprise dollars,” says Kevin Restivo, senior mobility analyst at IDC Canada. Although some business users still prefer the physical keyboard BlackBerry offers, corporations increasingly allow employees to bring their own smartphones to work. They tend to be anything but BlackBerry.
The company’s services business has weathered the damage best. BlackBerry maintains a reputation for security and provides an efficient system for IT departments to manage multiple devices. BlackBerry Enterprise Service 10 supports Apple devices and those running Google’s Android software, and the company has deployed 25,000 servers, up from 19,000 in July. If BlackBerry has a future, it may be as a niche provider of such services to corporations. Even then, it will have to fight Samsung, which has its own mobile management product, and smaller firms such as MobileIron. Assuming the deal goes through, Watsa could find BlackBerry is undervalued for good reason, and be forced to take more drastic measures to recoup his investment.