Can BlackBerry Be Saved By Fairfax Buy?

Fairfax Financial offers $4.7 billion in a bid to take BlackBerry private. What can Fairfax really accomplish here?
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BlackBerry announced late Monday that it has signed a letter of intent with Fairfax Financial Holdings Limited that could lead to the firm being acquired. The letter of intent isn't a binding contract, but it has set BlackBerry on a path that may end with the company taken private by a consortium of equity investors led by Fairfax. Fairfax and its partners have offered $4.7 billion for the ailing smartphone maker.

Fairfax already holds about 10% of BlackBerry's stock. Under the terms of the agreement, Fairfax and its partners will pay $9 per share in cash to acquire all the outstanding shares that it does not already own. The consortium has six weeks to perform due diligence, during which time BlackBerry has the right to shop for a better deal. BlackBerry and Fairfax said the due diligence process should be complete by Nov. 4. They expect to close the deal by then, as long as BlackBerry doesn't receive a better deal.

"We believe this transaction will open an exciting new private chapter for BlackBerry, its customers, carriers and employees," said Fairfax CEO Prem Watsa. "We can deliver immediate value to shareholders, while we continue the execution of a long-term strategy in a private company with a focus on delivering superior and secure enterprise solutions to BlackBerry customers around the world."

BlackBerry CEO Thorsten Heins stands to make $56 million if the deal is completed. Meanwhile, the company is in the process of laying off 4,700 employees and recently announced a major write-down on unsold Z10 inventory totaling a whopping $1 billion.

[ BlackBerry is still releasing new devices, despite its troubles. See BlackBerry Debuts Z30 Phablet. ]

Taking the company private solves only one actual problem: shareholder discontent with the declining value of their investment. Turning the company over to private bankers doesn't fix the fundamental problem facing BlackBerry, which is that no one wants its smartphones.

"The company's device sales are cratering, and its announcement last week that it no longer intends to pursue the consumer market is essentially the death knell for this business," said Ovum analyst Jan Dawson. "BlackBerry's supply chain relies on scale for profitability, and it will never again be able to achieve the scale necessary to make money on devices. It's likely that BlackBerry will be out of the device business entirely by the middle of next year."

BlackBerry's former co-CEOs Mike Lazaridis and Jim Balsillie obstinately refused to see the Apple iPhone (and later, Android smartphones) as a competitive threat. It wasn't long after the iPhone's debut that consumers and even BlackBerry's bread-and-butter customers -- large enterprises -- began to ditch their BlackBerrys for iPhones and Android smartphones.

BlackBerry traditionally earned about 70% of its revenue from device sales and the remaining 30% from a mix of software and services. For example, it offers its BlackBerry Enterprise Services to enterprises that need to manage their fleets of smartphones.

"The next challenge is that BlackBerry's other businesses are all to a greater or lesser extent dependent on its devices business," continued Ovum. "BlackBerry Messenger's installed base is entirely on BlackBerry devices, and its launch on iOS and Android was aborted over the weekend. Its mobile device management business is entirely based on its ability to manage BlackBerry devices, and its cross-platform management is much less well established than those of major competitors like MobileIron and Airwatch. If you strip out BlackBerry's use of its QNX operating system for BlackBerry devices, you're left with a business that's worth less than $100 million."

Fairfax may be ponying up $4.7 billion, but so far it hasn't offered a roadmap or solution to any of these problems. BlackBerry is facing a crisis of identity. It is no longer a competitive smartphone maker, having lost to Apple, Google and, to a lesser extent, Microsoft. There's no room in the smartphone ecosystem for a fourth major operating system, and BlackBerry is the company now left without a chair in which to sit.

If the deal goes through as proposed and Fairfax, et al., acquire BlackBerry, they will have only themselves -- and BlackBerry's few remaining customers -- to answer to. Will it scrap the handset business and focus on services? Can its services business even stand alone without handsets? Will it license its patent portfolio? Fairfax has to ponder these and many other questions as it looks to reinvigorate a dying company.