It's decision week for BlackBerry Ltd., the battered former champion of Canada's technology industry.
Monday is the day by which Fairfax Financial Holdings Ltd. is expected to finalize a deal to buy the smartphone maker for $4.7-billion (U.S.). The conditional offer, for $9 a share, is the only thing resembling a takeover bid that BlackBerry shareholders have seen since the company formally put itself on the auction block in the summer.
Fairfax is pledging no new money to the deal – it is already the largest shareholder, at nearly 10 per cent – which makes its bid look like more of a defensive move to protect its sunk investment. Indeed, some believe that Fairfax chief executive Prem Watsa does not want to buy the company so much as provoke another bidder into doing so.
Others have looked at BlackBerry, but as of Sunday evening, the only other group that appeared to be seriously considering a bid is one composed of company founders Mike Lazaridis and Doug Fregin, private equity firm Cerberus Capital Management and U.S. chip maker Qualcomm Inc.
A close examination of the group reveals that its key members have one thing in common: a vested financial interest in preventing the auction, and BlackBerry itself, from failing.
Each of the partners would enter the consortium with very different motives.
For the co-founders, particularly Mr. Lazaridis, the former co-CEO, it is a chance to protect their personal wealth, much of which is tied up in BlackBerry stock. There is also a question of legacy: Mr. Lazaridis has said he is loath to see a break-up of the once-great Canadian company, an engine of the Waterloo economy and pride of the region. He is a staunch nationalist and fiercely protective of what BlackBerry brought to the world.
He also believes in the BlackBerry 10 platform that was supposed to turn around the company, and likely feels that its failure to reignite sales says more about the plan by current management than the technology itself. He is inspired by past turnarounds of fallen tech giants IBM, Apple and Intel. Whatever his plan is to fix the company, it is as much driven by emotion and sentiment as by corporate strategy.
Qualcomm's interest is easier to pinpoint: It is the one tech company with the most to lose if BlackBerry fails. Qualcomm, a major supplier of semiconductors to mobile device makers, likely earns tens, if not hundreds of millions of dollars per year selling its chips to BlackBerry.
But Qualcomm also uses its clout and market power to squeeze a secondary revenue stream from BlackBerry and other customers: licensing royalties, which make up close to one-third of its total revenues and a significantly higher proportion of its operating earnings.
Senior industry sources estimate Qualcomm earns in the range of 5 per cent to 6 per cent of BlackBerry's total revenue from royalties paid by BlackBerry. That would amount to hundreds of millions of dollars per year in payments, and it is almost pure profit for Qualcomm.
Qualcomm is flush with cash, but may be more dependent on BlackBerry's continued viability than observers realize. In its most recent financial disclosures, Qualcomm states that it "derives a significant portion of licensing revenues from a limited number of licensees" – one of which, sources say, is BlackBerry. "Our future success depends on the ability of our licensees to develop, introduce and deliver high-volume products that achieve and sustain customer acceptance."
Translation: If BlackBerry stops making devices and breaks apart, it wouldn't hurt Apple, Samsung or Google – but it would bite into Qualcomm's financial performance. Joining a successful bid also gives Qualcomm the opportunity to be the first-in-line bidder for BlackBerry's considerable patent portfolio should the turnaround fail.
"Qualcomm wants to keep BlackBerry in business, but if it blows up they likely get carcass rights," one senior tech industry observer said.
That leaves Cerberus, whose involvement is the most hopeful sign for the future of BlackBerry: it is the one potential bidder with no existing financial interests to protect. It is not just a financial engineer or a vulture fund that strips companies for parts, but rather an operationally-focused investor with a track record of turning around distressed companies, including Air Canada and Teleglobe.
Its presence at the table alone suggests all is not necessarily lost for BlackBerry. But it also doesn't guarantee current investors will get a lot more than $9 for their shares.