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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 yea

by cs702 13y ago

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%20from%20Annual%20Report%202012%20FINAL_v001_o7033s.pdf http://www.fairfax.ca/files/Letter%20to%20Shareholders%20fro...

JonFish85 13y ago
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.
- deleted 13y ago
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- beat 13y ago
  As I put it elsewhere, there's not $4.7B of meat on the corpse. And that seems against the grain of a growth-oriented fund. That's the sort of thing that old-school junk bond funds would do to buy up and part out factories, inventory, and pension funds. The only justifications I can think of for buying Blackberry are a: to rebuild them, b: to integrate their good tech into an existing system (a good play for an also-ran smart phone that wants more market share and is willing to gamble for Blackberry's old, loyal enterprise market), c: to deliberately put them out of business (a good play for a successful smart phone to either go after the vacuum created by their death, or prevent competitors from exercising plan B).
  - mathattack 13y ago
    Just extrapolating from http://finance.yahoo.com/q?s=BBRY http://finance.yahoo.com/q?s=BBRY rather than digging in to financial statements: Blackberry has $10 billion in annual sales while losing $200 million. Is it such a stretch to imagine a buyer killing R&D and investment, and marketing the carcass for enough years of free cash flow to get back the $4.7 billion? Value investors aren't necessarily growth investors. The margin of error they look for can come from a cheap price.
    - tomkarlo 13y ago
      Blackberry has rapidly declining sales (-50% in 2 years)... you'd have to hope to not just cut costs, but cut them faster (and repeatedly) to stay ahead of the current decline in sales. And you'd have to expect that decline to accelerate if you're cutting back on R&D (and probably facing general brain drain - why would a good mobile engineer keep working for a company in obvious wind-down? Nobody likes to work on an EOL platform.)
      - mathattack 13y ago
        In this environment you pay the folks keeping the lights on "just enough"
        tomkarlo 13y ago
        That works if it's a factory. It doesn't work that well in a mobile device manufacturer. Anyone selling wireless devices is subject to ongoing changes in the regulatory environment, plus security threats. If they don't have a team better than what you get by paying "just enough", bitrot will set in within a year.
        mathattack 13y ago
        I'm sure it will. But the scenario in question is "How do you wind down the beast taking as much cash out as possible?" It's similar to, "What if AOL just tried to milk the subscriptions instead of blowing all that money?"
hbbio 13y ago
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." Source Wikipedia: http://en.wikipedia.org/wiki/Prem_Watsa http://en.wikipedia.org/wiki/Prem_Watsa
cremnob 13y ago
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.
dirkdk 13y ago
Blackberry has $2.8 billion in cash in the bank, so price is $1.9 billion. Not bad for a huge set of patents
- bsullivan01 13y ago
  If they can stop the bleeding, which I suppose they will if their goal is to chop shop it. They'll fire another 30% and start shopping parts of BB
  - jsz0 13y ago
    First step stop making $1B worth of devices no one wants to buy.
- jonknee 13y ago
  Not really, that's accounts receivable. They also have $3.4 billion in liabilities.
  - kcg 13y ago
    No, as of June 1 the company had $2.8B of cash, cash equivalents AND short-term investments (liquid securities). There's an additional $2.5B of accounts receivable on the balance sheet. You are correct that BBRY has $3.4B of current liabilities.
jrn 13y ago
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.
- rescripting 13y ago
  http://m.here.com http://m.here.com does a great job in the BB10 browser, but I agree that Nokia maps in a native app would be a great addition.
goodcanadian 13y ago
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.
- deleted 13y ago
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- joonix 13y ago
  IP and buildings are already counted in assets so I'm not sure where you are getting that from.
Zikes 13y ago
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.
- smtddr 13y ago
  I definitely agree with this. With all these multi-featured & difficult to secure smartphones out there, we definitely have an untapped market in enterprise-secure smartphones in the same way box.com is the enterprise-version[1] of dropbox.com. 1. Note I'm avoiding the argument about what makes dropbox less secure than box.com. I have no idea, but somehow box.com is making money. The company I work for mandated box.com over dropbox citing "security concerns". Whatever the reason/mindset exists that concludes dropbox is less secure than https://www.box.com/enterprise/ https://www.box.com/enterprise/ , is the same mindset that would buy "enterprise-secure" smartphone over whatever trendy iOS/Android phone is available.
  - Zikes 13y ago
    I can't get to box.com myself to see if it's any different, but I do know that dropbox has full access to files you store on their servers. That's an automatic red flag for a lot of companies.
    - madeofpalk 13y ago
      Many companies go for Box because you can se per-folder permissions and creates groups of users for permissions. These sorts of things are pretty mandatory for companies of reasonable size.
- crazytony 13y ago
  I don't know. Most non-tech execs I know would rather chew off their arm than give up their iphone.
jpswade 13y ago
I suspect Blackberry is a dying platform, but it's IP and licenses have value. This seems like your textbook acquire, split and sell.
- mathattack 13y ago
  They may also be able to ride the machine down by underinvesting in R&D and marketing.
mathattack 13y ago
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.
rorrr2 13y ago
As long as they can squeeze more than $4.7B out of RIM, it doesn't matter if it's a dying brand (which it is).
slykat 13y ago
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.
- turingbook 13y ago
  Interesting analysis. There is another analysis from Quartz: 0 for phone business, 1.2 billion for BBM and enterprise infrastructure, 2.8b cash, 1b for patent portfolio. http://qz.com/127441/cheat-sheet-here-are-the-bits-of-blackberry-investors-want-to-flip-for-a-profit/ http://qz.com/127441/cheat-sheet-here-are-the-bits-of-blackb...
  - slykat 13y ago
    I'd like to caution that this analysis is incredibly flawed. Specifically it magically ignores the entire liabilities side of the balance sheet (when you buy a company you don't just inherit their cash balances but also their debts). This is the problem with most financial journalism; you shouldn't taking financial advice from someone who doesn't understand the income statement or balance sheet. All I did was take the balance sheet and pull out intangible assets: https://www.google.com/finance?q=NASDAQ%3ABBRY&fstype=ii&ei=yeZAUpjBO6iolwOoXw https://www.google.com/finance?q=NASDAQ%3ABBRY&fstype=ii&ei=.... I did NOT consider the value of earnings from any of the business (i.e. income sheet) as the investment thesis I made was for shutting down the business, and I don't want to divine profitability from each of the business lines. They really need to require finance coursework in college so this kind of fake financial journalism gets stamped out.
outside1234 13y ago
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.
sireat 13y ago
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.
deleted 13y ago
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by cs702 13y ago

JonFish85 13y ago

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.

deleted 13y ago
[deleted]
beat 13y ago
As I put it elsewhere, there's not $4.7B of meat on the corpse. And that seems against the grain of a growth-oriented fund. That's the sort of thing that old-school junk bond funds would do to buy up and part out factories, inventory, and pension funds. The only justifications I can think of for buying Blackberry are a: to rebuild them, b: to integrate their good tech into an existing system (a good play for an also-ran smart phone that wants more market share and is willing to gamble for Blackberry's old, loyal enterprise market), c: to deliberately put them out of business (a good play for a successful smart phone to either go after the vacuum created by their death, or prevent competitors from exercising plan B).
- mathattack 13y ago
  Just extrapolating from http://finance.yahoo.com/q?s=BBRY http://finance.yahoo.com/q?s=BBRY rather than digging in to financial statements: Blackberry has $10 billion in annual sales while losing $200 million. Is it such a stretch to imagine a buyer killing R&D and investment, and marketing the carcass for enough years of free cash flow to get back the $4.7 billion? Value investors aren't necessarily growth investors. The margin of error they look for can come from a cheap price.
  - tomkarlo 13y ago
    Blackberry has rapidly declining sales (-50% in 2 years)... you'd have to hope to not just cut costs, but cut them faster (and repeatedly) to stay ahead of the current decline in sales. And you'd have to expect that decline to accelerate if you're cutting back on R&D (and probably facing general brain drain - why would a good mobile engineer keep working for a company in obvious wind-down? Nobody likes to work on an EOL platform.)
    - mathattack 13y ago
      In this environment you pay the folks keeping the lights on "just enough"
      - tomkarlo 13y ago
        That works if it's a factory. It doesn't work that well in a mobile device manufacturer. Anyone selling wireless devices is subject to ongoing changes in the regulatory environment, plus security threats. If they don't have a team better than what you get by paying "just enough", bitrot will set in within a year.
        mathattack 13y ago
        I'm sure it will. But the scenario in question is "How do you wind down the beast taking as much cash out as possible?" It's similar to, "What if AOL just tried to milk the subscriptions instead of blowing all that money?"

hbbio 13y ago

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." Source Wikipedia: http://en.wikipedia.org/wiki/Prem_Watsa http://en.wikipedia.org/wiki/Prem_Watsa

cremnob 13y ago

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.

dirkdk 13y ago

Blackberry has $2.8 billion in cash in the bank, so price is $1.9 billion. Not bad for a huge set of patents

bsullivan01 13y ago
If they can stop the bleeding, which I suppose they will if their goal is to chop shop it. They'll fire another 30% and start shopping parts of BB
- jsz0 13y ago
  First step stop making $1B worth of devices no one wants to buy.
jonknee 13y ago
Not really, that's accounts receivable. They also have $3.4 billion in liabilities.
- kcg 13y ago
  No, as of June 1 the company had $2.8B of cash, cash equivalents AND short-term investments (liquid securities). There's an additional $2.5B of accounts receivable on the balance sheet. You are correct that BBRY has $3.4B of current liabilities.

jrn 13y ago

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.

rescripting 13y ago
http://m.here.com http://m.here.com does a great job in the BB10 browser, but I agree that Nokia maps in a native app would be a great addition.

goodcanadian 13y ago

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.

deleted 13y ago
[deleted]
joonix 13y ago
IP and buildings are already counted in assets so I'm not sure where you are getting that from.

Zikes 13y ago

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.

smtddr 13y ago
I definitely agree with this. With all these multi-featured & difficult to secure smartphones out there, we definitely have an untapped market in enterprise-secure smartphones in the same way box.com is the enterprise-version[1] of dropbox.com. 1. Note I'm avoiding the argument about what makes dropbox less secure than box.com. I have no idea, but somehow box.com is making money. The company I work for mandated box.com over dropbox citing "security concerns". Whatever the reason/mindset exists that concludes dropbox is less secure than https://www.box.com/enterprise/ https://www.box.com/enterprise/ , is the same mindset that would buy "enterprise-secure" smartphone over whatever trendy iOS/Android phone is available.
- Zikes 13y ago
  I can't get to box.com myself to see if it's any different, but I do know that dropbox has full access to files you store on their servers. That's an automatic red flag for a lot of companies.
  - madeofpalk 13y ago
    Many companies go for Box because you can se per-folder permissions and creates groups of users for permissions. These sorts of things are pretty mandatory for companies of reasonable size.
crazytony 13y ago
I don't know. Most non-tech execs I know would rather chew off their arm than give up their iphone.

jpswade 13y ago

I suspect Blackberry is a dying platform, but it's IP and licenses have value. This seems like your textbook acquire, split and sell.

mathattack 13y ago
They may also be able to ride the machine down by underinvesting in R&D and marketing.

mathattack 13y ago

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.

rorrr2 13y ago

As long as they can squeeze more than $4.7B out of RIM, it doesn't matter if it's a dying brand (which it is).

slykat 13y ago

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.

turingbook 13y ago
Interesting analysis. There is another analysis from Quartz: 0 for phone business, 1.2 billion for BBM and enterprise infrastructure, 2.8b cash, 1b for patent portfolio. http://qz.com/127441/cheat-sheet-here-are-the-bits-of-blackberry-investors-want-to-flip-for-a-profit/ http://qz.com/127441/cheat-sheet-here-are-the-bits-of-blackb...
- slykat 13y ago
  I'd like to caution that this analysis is incredibly flawed. Specifically it magically ignores the entire liabilities side of the balance sheet (when you buy a company you don't just inherit their cash balances but also their debts). This is the problem with most financial journalism; you shouldn't taking financial advice from someone who doesn't understand the income statement or balance sheet. All I did was take the balance sheet and pull out intangible assets: https://www.google.com/finance?q=NASDAQ%3ABBRY&fstype=ii&ei=yeZAUpjBO6iolwOoXw https://www.google.com/finance?q=NASDAQ%3ABBRY&fstype=ii&ei=.... I did NOT consider the value of earnings from any of the business (i.e. income sheet) as the investment thesis I made was for shutting down the business, and I don't want to divine profitability from each of the business lines. They really need to require finance coursework in college so this kind of fake financial journalism gets stamped out.

outside1234 13y ago

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.

sireat 13y ago

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.

deleted 13y ago

[deleted]