BLACKBERRY MESS PULLS CANADA'S CONTRARIAN MOGUL OUT OF THE BACKGROUND
c.2013 New York Times News Service
Throughout the first weekend of November, V. Prem Watsa, the Canadian immigrant success story and chairman of Fairfax Financial Holdings, was huddled in the offices of his Toronto law firm, Torys, trying to salvage the biggest bet of his career.
In late September, Fairfax had made a highly conditional offer to buy BlackBerry, the struggling smartphone maker based in nearby Waterloo, Ontario. Few on Wall Street took the offer seriously, instead viewing it as a way for Fairfax, BlackBerry’s largest shareholder, to bring other buyers into the picture.
But as Fairfax’s takeover deadline loomed, no other buyers had surfaced and Fairfax had failed to find co-investors for its bid. Watsa and his team needed an alternative.
Finally, a solution of sorts emerged last Monday from the exhausted team backed by Watsa. Rather than buying out BlackBerry’s shareholders at $9 a share, Fairfax and BlackBerry announced a new deal that would raise $1 billion in cash through convertible debt sold to a combination of Canadian, U.S. and Qatari investors. Thorsten Heins, BlackBerry’s short-lived chief executive, was succeeded by a new executive chairman and interim chief: John S. Chen, another successful immigrant to North America who had turned around Sybase years earlier through a prescient move into mobile computing.
Many viewed it as just another stalling tactic in a situation where few good outcomes are likely. BlackBerry’s battered shares dropped even lower.
Yet Watsa’s determination to be personally involved in a messy corporate implosion speaks to his own pride, his affection for Canada and his reluctance to walk away from what could be one of the worst moves he ever made.
Arguably Canada’s leading contrarian investor, Watsa enjoys a disproportionately large reputation as a canny investor within the country’s relatively small financial community. But unlike, say, Conrad M. Black, he is far from a public figure.
Watsa and his executives gave no interviews to media outlets for years and now do so only sporadically. And Fairfax, which was founded in its current form in 1985, only began quarterly conference calls with analysts in 2003. No one from the company would be interviewed for this story.
Even in a country with a large population of immigrants from South Asia, many of whom went on to great success, Watsa, 63, stands out. He was born near Hyderabad, India, and studied chemical engineering at the Indian Institute of Technology before joining his brother in London, Ontario, after his graduation in 1971. He sold air conditioners and furnaces door to door to pay for MBA studies there at the University of Western Ontario.
In Watsa’s legend, a key moment is when one of his managers at Confederation Life, a now defunct insurer, gave him a copy of “The Intelligent Investor” by Benjamin Graham. The book’s advocacy of value investing resonated with Watsa, who also came to admire Warren E. Buffett, chairman of Berkshire Hathaway, for similar reasons.
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Fairfax owns a variety of insurance companies whose premiums provide it with a steady stream of capital for investment in a structure similar to Berkshire’s. Like Buffett, Watsa appears to take pride in his annual letter to shareholders, although his writing style leans toward the liberal use of exclamation points.
Some argue that the comparisons end there.
“Psychologically speaking, he thinks he’s the Warren Buffett of the North,” said one person who has followed his business closely over the years. But that person, who spoke on the condition of anonymity because he still occasionally does business with Watsa and did not want to offend him, noted that Watsa favored investing in distressed firms with comparatively few shareholders, with BlackBerry being a notable exception.
“Typically, he does these things in not such public high-profile companies. The rules of the game that he applied over his career don’t work in a liquid stock like this,” the critic said.
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A person who worked with Watsa in the past said that BlackBerry is precisely the sort of challenge Watsa seeks and relishes.
“When it’s down and you can’t find a single person to help it, that’s where he wants to be,” said this person, who spoke on the condition of anonymity because he did not want to complicate relations with Watsa, whom he still knows socially.
But he acknowledged that Fairfax was blindsided by the amount of publicity generated by the failed buyout offer.
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A decision in 2002 to add a listing on the New York Stock Exchange as well as Toronto forced Fairfax and Watsa out of their shells. It came in the middle of a seven-year period when problems with some insurance acquisitions in the U.S. hampered Fairfax’s financial performance.
Hedge funds in the U.S. shorted Fairfax’s stock, driving its share price downward while attacking the strategies and methods of Watsa and his company.
In 2006, Fairfax sued a group of hedge funds including SAC Capital Advisors and Third Point, contending that they had tried for years to destroy the reputation of Watsa and Fairfax, and then profit by betting that Fairfax’s stock would fall.
Though many of the funds were dismissed from the case, Watsa continued to pursue them for years, spending tens of millions of dollars on legal fees.
“We didn’t really understand the extent to which the short side of the equation would dominate the story,” the person who once worked with Watsa said. The funds, he said, “just about destroyed the company.”
People close to the hedge funds said they had legitimate reason to believe that Fairfax had in fact incurred huge losses, but was masking them. Whether or not that was the case, Watsa then made back those losses and brought Fairfax to new heights by successfully betting against the U.S. housing market well before the financial crisis. Fairfax voluntarily delisted from the New York exchange in 2009.
Watsa again uncomfortably finds himself under the microscope as he grapples with perhaps his greatest challenge ever in BlackBerry.
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In 2009, Watsa was recruited as the chancellor of the University of Waterloo by BlackBerry’s co-founder and former co-chairman Mike Lazaridis, and the two became friends. When BlackBerry’s plummeting market share and stock price led Lazaridis to step down as co-chief in January 2012, Watsa revealed that he owned 5.1 percent of the company and joined its board. He soon doubled that holding and became a public champion of the company.
In his last shareholders’ letter, Watsa said that Fairfax, which owns about 10 percent of the company, had paid an average price of $17 a share. On Friday, the stock closed at $6.56 share on Nasdaq. It is down nearly 45 percent this year.
The person who once worked with Watsa said he most likely miscalculated how public scrutiny would impair his turnaround efforts with BlackBerry, a company that has been a symbol of national pride in Canada. “He didn’t understand the extent the brand recognition mattered here,” this person said.
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Fairfax consulted former mobile executives from Motorola and Ericsson about a successor for Heins. Chen, who was born in Hong Kong, was among the top three names on their list.
Chen will commute from California to Canada, and will not be the permanent chief executive. Fairfax nonetheless is apparently counting heavily on him to find a way out for BlackBerry.
Chen is somewhat similar to Watsa, his former associate said. “He came across instantly as a guy who was up for the challenge,” the person said. “He’s a guy who wants to be there for a long time. He didn’t flip Sybase.”
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Aside from the lack of an obvious strategy for BlackBerry, turning the company around while it remains publicly traded will be an enormous challenge, said Douglas Cumming, a professor of finance at York University’s Schulich School of Business in Toronto.
“If they think they can get this all sorted out in the public eye, that’s going to be a pretty rare event,” Cumming said, adding that continued disclosure of BlackBerry’s financial problems will further erode the confidence of customers in the brand’s future.
A person who has squabbled with Watsa over the years is skeptical that Fairfax will be able to save BlackBerry.
“There have been a lot of smarter people looking at this, and they can’t seem to make it work,” he said. “Warren Buffett isn’t buying broken-down tech companies.”