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October 11, 2013

BlackBerry Now Thinking Breaking Up is Not So Hard to Do

As the BlackBerry board-imposed deadline (Nov. 4, 2013) looms for interested potential rivals to Fairfax Financial to submit bids for Blackberry, what has to date struck us as a not particularly onerous acquisition scenario for a not very onerous $4.7 billion seems to be running into a variety of roadblocks. Samsung, Cisco and SAP are all supposedly looking to find their way to owning "pieces" of BlackBerry, but aside from Fairfax it has become clear that no one actually wants the entire BlackBerry enchilada. There is as well the underlying cash position of BlackBerry - which is worth about $2.6 billion - to consider.

The enterprise tech vendors - SAP and Cisco - may be looking at as many as 25+ million enterprise subscribers as both an ongoing revenue stream based on the use of BlackBerry Enterprise Server (BES) and BlackBerry's global NOC infrastructure and BlackBerry's substantial collection of federal government security certifications as the key pieces of interest. This makes sense for both of them - there are no doubt numerous ways to evolve this core piece of business into longer term pure Cisco or SAP product suites. It may make sense, especially as both Cisco and SAP look to expand their global reach into the exploding healthcare industry and the still highly security-conscious financial institutions.

Samsung on the other hand (and possibly Microsoft and Intel), may be interested only in BlackBerry's patent portfolio, which in and of itself might be worth as much as $3 billion of the total worth of BlackBerry in its current state. We ourselves have long believed that Samsung should acquire BlackBerry to solidify a true enterprise play for itself and to adopt BES, the NOC and BlackBerry OS 10 to its own smartphone and tablet devices - which enterprise users clearly love to use. Samsung could have those 25 million enterprise users all to itself and would have another 50 million or consumer BlackBerry users to itself to convert to Samsung Android or Samsung BB 10 devices. We personally think this would be huge for Samsung to grow its user base. And of course the patent portfolio and BlackBerry's cash would go along for the ride.

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Last, this morning we've heard that BlackBerry founder and former co-CEO Mike Lazaridis is looking into the possibility of acquiring BlackBerry's device business. Lazaridis continues to truly cling to the notion that BlackBerry users love their keyboard-based devices and would no doubt put a huge emphasis on trying to revive the keyboard-centered business. This is the exact thinking that more or less destroyed BlackBerry as a major player in the first place - and yes, we acknowledge that this is what made BlackBerry a powerhouse in the first place, but it is not a winning 21st strategy.

It may of course make for a nice small niche business - perhaps that is what Lazaridis is thinking. After all, that is what BlackBerry was until the late 1990s. It isn't clear to us if a bid would include any of the patent portfolios or any of the $2.6 billion of cash on hand.

The collection of alternative offers are interesting - especially to current investors, for several reasons. First, most investors are apparently growing increasingly uneasy that Fairfax will not be able to pull together the necessary funding to close the deal it has put on the table. The stock is currently trading about 10 percent below Fairfax’s $9 per offer and for larger shareholders this is not trivial.

There is valid cause for concern here. Fairfax’s chief executive officer (and still the largest individual holder of BlackBerry shares) Prem Watsa has not yet named any of the other members in his buyout consortium. The group - whoever it consists of - has been anticipating receiving funding from Bank of America Corp. and BMO Capital Markets, but to date no financing deal has been announced.

Alberta Investment Management Corp. and Canada Pension Plan Investment Board, two of Canada’s largest pension funds, have both said they would consider joining a bid for BlackBerry, though neither has committed to the idea. Leo de Bever, Alberta Investment's CEO underscores that the bidding process has been unusual and that BlackBerry will probably be broken up. “It’s the most bizarre sales process I’ve seen in a long time. We’re looking at it, but nobody’s come to us with a proposal that makes any sense.”

Second - and perhaps of more interest as de Bever points out - is the growing belief among larger investors that the company would be worth a lot more if it is broken up and sold in pieces. This thinking now looks to include the BlackBerry board members. Lisette Kwong, a BlackBerry spokeswoman, has noted that the board is working with independent financial and legal advisers to conduct a robust and thorough review of all of its strategic options. That said, Kwong also said that, “We do not intend to disclose further developments with respect to the process until we approve a specific transaction or otherwise conclude the review of strategic alternatives."

Meanwhile, we remain ever steadfast in our belief that Samsung is the right buyer for BlackBerry.

Edited by Alisen Downey

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