It's fun to talk about optimal M&A strategy but really that's a luxury reserved for happier companies than BlackBerry, which today announced that Fairfax Financial Holdings, which currently owns about 9.9 percent of its shares, wants to buy the rest of the company for $9 a share.* This is sort of an unimpressive deal. For one thing, BlackBerry closed at $10.52 on Thursday so selling the company at $9 today seems pretty rough.
On the other hand, BlackBerry's earnings had a horrible horrible accident shortly after that Thursday close, and then they fired everyone and stuff, so you can't get too worked up about the price. It's more than zero!
More notably, though, Fairfax is not agreeing to buy BlackBerry. It's agreeing to intend to buy BlackBerry, but that's subject to due diligence by Fairfax and its lenders: They have until Nov. 4 to check out BlackBerry and decide if this is really a good idea. (Also, Fairfax doesn't really have any lenders, though it's "seeking financing from BofA Merrill Lynch and BMO Capital Markets." One hopes that this press release isn't the first the banks have heard of it.) I imagine this boilerplate is a bit more than boilerplate:
In addition to the consortium and its lenders being satisfied with all aspects of the due diligence to be carried out by them during the Diligence Period and the negotiation and execution of a binding definitive agreement approved by the board of BlackBerry, completion of the transaction will be subject to other customary conditions, including receipt of required regulatory approvals. There can be no assurance that due diligence will be satisfactory, that financing will be obtained, that a definitive agreement will be entered into or that the transaction will be consummated.
Fairfax has been a BlackBerry investor since at least 2011, so the need for diligence sounds a bit odd, but then BlackBerry has been full of surprises since at least 2011. It is not hard to imagine Fairfax finding unpleasant surprises in due diligence, or those surprises blowing up the deal.
For its part, though, BlackBerry really is agreeing to be sold to Fairfax: If the company stops negotiating with Fairfax, or if it enters into another transaction, it will owe Fairfax 30 cents a share, or about $157 million,** which is a lot of money for BlackBerry. It really can't walk away from a sale*** -- not that it'd want to -- and getting a higher offer will be that much harder if $157 million of it needs to go to Fairfax.
So BlackBerry has little downside protection -- if it implodes, or if Fairfax's ardor cools, in the next six weeks, Fairfax can walk away and leave the company with nothing -- and limited upside beyond that $9. Actually "leave the company with nothing" there was generous: If Fairfax concludes after due diligence that it doesn't want to buy BlackBerry, and announces that publicly, that is what you'd have to consider a Bad Sign. Presumably, Fairfax knows that.
Presumably, also, BlackBerry could have just not done this: It could have negotiated quietly with Fairfax to get a deal done, and then announced an actual -- diligenced, financed, committed -- deal in six weeks or whatever. Why announce a non-deal now, especially one that binds BlackBerry but not Fairfax?
Well what else could they do? The stock was doing bad things since the glory days of last Thursday afternoon, and everyone knew that the company had to sell itself. Each day that went by without announcing a deal would likely take more value off the company, as it looked increasingly unlikely to find a buyer. A fast deal, even a not-so-binding one, would likely deliver more value to shareholders than a drawn-out process. And a nonbinding deal with Fairfax, "sometimes called the Berkshire Hathaway of Canada," already a BlackBerry shareholder, and somewhat interested in maintaining a reputation for keeping its promises, is probably better than a nonbinding deal with most other possible buyers.**** It puts a -- very, very squishy -- floor under the stock price. And, who knows, maybe it'll attract other bidders despite Fairfax's favored position.
Fairfax's deal isn't much, but it's worth a lot to BlackBerry's people. And they know it, which is why it's structured as a free option to Fairfax with a $157 million breakup fee. Creating the appearance of interest in BlackBerry is valuable, and taking on even a moral risk of having to close the deal is hard work. Obviously, Fairfax wants to be paid for it.
* All $'s are US $'s.
** Fifty cents, or $262 million, if it takes another deal after signing a definitive agreement with Fairfax, though that seems less likely.
*** Unless Fairfax "shall have reduced the price offered below U.S. $9.00 per share without the approval of the board of directors of BlackBerry," which is a rough thing to have to spell out.
**** BlackBerry's co-founder Mike Lazaridis apparently wanted to buy the company. It'd be funny if he demanded due diligence! But actually the problem is he has no money and his co-investors and financing sources would probably be bigger sticklers than Fairfax. A deal with the co-founder, subject to co-investor and financing diligence, sooooooort of sounds like no deal at all, and doesn't really invite competing bids. A deal with Fairfax sounds more like a deal.
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Matthew S Levine at firstname.lastname@example.org