I Screwed Up
Sometimes, a part of the financial and investing business is about taking a second to realize you might be wrong, and then being man enough to admit to those mistakes.
In my article yesterday, immediately after the buyout news of BlackBerry (BBRY) was announced, I went into my "post-announcement buyout" mode; which is a trick I sometimes use or suggest to make a quick scalp when a company is trading several percent below its announced buyout price. The hope is that a bidding war will start, and the price will bump up - or, like in the recent case of Dell (DELL), the buyout simply goes through as planned, and investors can yield a couple of percent. It's generally a risk-adverse plan, and I assumed that the case would be the same with BlackBerry.
Every once in a while, I realize that I may have screwed up - bad. This is one of those times, and I want to be the first to admit it, before making myself look like a fool by continuing to back this buyout offer. I had the cart in front of the horse, big time; suggesting a buyout scalp before really ever plunging into the details of the buyout. It was rash and foolish. As you grow as an investor, you promise yourself over and over that you won't make fast-paced decisions without doing major due diligence; but, once in a while, you slip up.
Such is the case that I'm dealing with today, after last night's news about Fairfax merely rolling over its existing 9.9% stake in the company and not investing in any more cash. It was reported last night that Fairfax is going to rely on other investors to finance the deal through a combination of debt and equity.
I took a step back, and weighed out exactly what had happened the last three days with BBRY. The macro/bird's eye view of things painted a bit of a weird picture for me - one that doesn't exactly make me comfortable buying at those $8.80 prices that I was infatuated with yesterday. I wanted to share my thoughts in another article, and possibly give some investors that read and agreed with me yesterday, some much needed pause.
Here's the 5 major things that changed my mind:
1. The Due Diligence is Yet to Come and Can Be Used an Excuse to Back Out
After further review, it looks like the serious due diligence to be done by Fairfax is going to be done over the next six weeks:
For the next six weeks, a Fairfax-led group will scrutinize the device maker's books while BlackBerry Chief Executive Officer Thorsten Heins and a special board committee see if there are any alternative proposals.
When you talk about a buyout offer, you automatically assume that the company doing the buying has already done their due diligence on the company that's going to be bought. While this is usually the case, and I'm sure Fairfax has a much better idea of what BBRY's books look like than the common investor, I don't' like this six week due diligence period for two main reasons:
- It provides a window for Fairfax to basically make something up about the company they don't like, back out of the deal, and attribute it to the due diligence.
- It provides a window for Fairfax to actually, legitimately find something horribly wrong about BlackBerry's internals that would again, likely lead to them backing out.
With the announcement already "announced", even though it's just in principle, the six week DD window can only lead to bad things - not good. In other words, there's roughly 0% chance that Fairfax will find something in these six weeks that would have them raise their buyout price - it's 100% risk here.
2. It's Starting to Just Simply Look Like Fishing
In light of all the news that came out last night, it's starting to look like an operation simply set up to bring in other bids on the company.
You don't need to be an MBA student to realize that there isn't a lot of substance behind the Fairfax deal - they clearly want to put up the minimum and involve themselves in the smallest way possible to still make this happen through their "consortium".
With coming right out and announcing the waiting period between now and the time the buyout will close (if they find financing, remember), it's starting to look like this bid may have been intentionally set up like this to try and tip over a long line of dominoes in a bidding war.
The problem? No one else seems to be interested in buying BlackBerry. What happens if no one calls Fairfax's bluff and Fairfax mysteriously can't find financing?
3. Major Analysts Are Doubtful Right off the Bat
I give analysts a lot of flack. I don't generally trust any of them, I think they're all out to fleece retail investors with their suggestions, and I take everything they say with enormous grains of salt.
Having said that, analysts have the innate ability to also "smell what they're shoveling", and call out those who play the same types of games.
Right off the bat yesterday, analysts came out and suggested that this buyout may not be as clear and clean as everyone may think.
Barron's reported shortly after the deal was announced that Jim Siva of Citi and Maynard Um of Wells Fargo were both doubtful on the way that the buyout is put together:
Citigroup's Jim Suva, reiterating a Sell rating on the stock, and a $7 price target, this evening writes there is risk to Fairfax completing the necessary financing:
With the company's cash balance at $2.5 bln (as per their press release on Friday but unclear how much is domestic and tax impact from repatriating cash to shareholders) or $4.77/share, the transaction values the company at $2.2 bln net of cash. We do note that given the company's cash burn of $500 million in the August 2013 quarter and layoffs which will result in additional severance payments, there is risk to the cash balance. We also note that despite Fairfax's 10% ownership stake in the company, this deal requires debt financing. Details of additional members in the consortium, their potential equity stake and deals of the debt financing are not available currently. We believe obtaining financing for BBRY given the severity of its business fundamentals deterioration poses a real risk in this transaction. We believe Fairfax is hoping to spur additional bidders which we see as unlikely.
Also this afternoon, Wells Fargo's Maynard Um, who has a Market Perform rating on the shares, and an $8 to $9 "valuation range," writes that " We believe that another bidder may be unlikely given the recent performance of the company and any potential suitors will have to navigate through a multiyear restructuring plan (the breakup fee also raises the hurdle)."
4. Mike Lazaridis Not Involved, Despite Reports of Interest
The Mike Lazaridis situation is interesting. If you recall, Seeking Alpha reported just last Saturday that Lazaridis had approached both Blackstone and Carlyle about possibly putting in a bid for his company.
Seeking Alpha linked to several sources on this, including the New York Times and the Wall Street Journal. This shows that there's clearly an interest for Lazaridis to "take his company back".
Then, last night, it was reported that Lazaridis had been approached about the Fairfax deal, but wasn't interested in it.
"Our offer provides an extremely compelling combination of attractive and certain value for shareholders," Fairfax said in a filing. "We are highly confident that the consortium can fund the full amount of the consideration and all related transaction fees and expenses."
Watsa has held talks with BlackBerry co-founder Mike Lazaridis on working together on a deal, according to people with knowledge of the matter, who asked not to be identified because the discussions are private. In an interview today, Watsa said Lazaridis isn't yet involved in the transaction.
This means one of the following things:
- Lazaridis is no longer interested in the future of BBRY
- Lazaridis is going to continue to look for a PE firm and perhaps place a bid for the company separate from Fairfax, causing a "buyout brew-ha-ha"
- Lazaridis could potentially try and stand in the way of Fairfax and block their buyout
Similar to the situation at Dell that involved a company founder, this has the chance to get long, strung out, and ugly before all is said in done.
5. Potential Coming Legal Issues
Reading the comments of BlackBerry longs last night is where, admittedly, I got "Death Before Dishonor" from, as a title. The general sentiment behind many of the longs that I've spoken to - aside from thinking this deal stinks to high heaven - is that they'd rather take a 100% loss before having this company sold for any less than the low teens.
I know you're not supposed to get emotion involved in your trades, but longs have lost an enormous amount of money in BBRY thus far, and many of them are starting to stand on principle as to the fate of their company. Class action lawsuits have been thrown around left and right, and why wouldn't they be?
Let's take a quick look at the timeline of events here:
Friday - BBRY halts with news pending and announces that the company is laying off 4500 and taking massive write-offs. The stock plunges from over $10 to $8.20/share.
Saturday - Reports of Mike Lazaridis seeking out PE in order to put a bid in for the company.
Monday - Fairfax comes along with a deal (that likely had to be in the works before the weekend) for a $9/share tender offer.
Monday PM - It's announced that Fairfax doesn't really seem to have too much of their act together with this buyout, and that they're not putting up any additional capital towards it.
For the first time, I agree with BlackBerry longs here. I like this attitude of fighting for what's right and trying to get some value out of your investments that you've seemingly been bilked out of here. I also agree that the chronology of these events taking place should be a magnet for regulators and potential legal issues.
Does that mean that either of the two are definitely going to happen to notice? No. Unfortunately, as I noted in the comments to another article yesterday, the stock market makes it legal to make moves like this - that's all just a part of the secret fraternal world of finance.
If Lazaridis had backed the Fairfax deal, it'd be a different story - but it's starting to look more and more like the Fairfax buyout deal is a major house of cards, possibly waiting to crumble and take BBRY shares down with it.
Citron research, although generally not happy with anyone/anything, has also warned in regards to Fairfax's tactics for years now - with articles on them dating back to 2005 that I was able to find. I don't like to cite them as a major source, as I take them with a grain of salt also - but it's worth noting in this case.
An interesting way to hedge yourself here against another deal coming through or Fairfax not being able to turn around the BBRY business would be to short Fairfax. In terms of BlackBerry, there's really two sentiments I'm going to offer today:
1. I'm extremely content watching this occur from the sidelines and not investing any money in this.
2. I truly, genuinely, wish the best for those that are BlackBerry longs. I've had my beef with this company, and never saw it as a great investment vehicle in the past - but there's lots of investors that put their hard earned money into this company believing in it - and they deserve more than the shenanigans of the last 3 days.
Best of luck to all investors involved.