A recent news blip regarding Lenovo's (OTCPK:LNVGF) interest to buy parts of BlackBerry (BBRY) got me thinking just how big a part the Canadian government will play in any sale of the latter company - this article will investigate Canada's oversight position in any deal. Let it not go unmentioned that any projected piece-meal sale of the company will also face a competing bid from the likes of Prem Watsa through Fairfax Financial Holdings (OTCQB:FRFHF) or even parties such as Mike Lazaridis or Cerberus. In general, Canada supports foreign investment if the end result is beneficial for the country and any acquisition of control of a Canadian business by a foreign investor is subject to review by the Canadian government.
In Canada there is a fine line between acquisition of control of a non-cultural business and a cultural business. First we have to review whether BlackBerry is a cultural or a non-cultural business to see what laws an acquisition of the company would be subject to. Cultural business criteria are listed below, and BlackBerry does not seem to fit the bill of one.
- The publication, distribution or sale of books, magazines, periodicals or newspapers in print or machine-readable form, but not including the sole activity of printing or typesetting books, magazines, periodicals or newspapers;
- The production, distribution, sale or exhibition of film or video recordings;
- The production, distribution, sale or exhibition of audio or video music recordings;
- The publication, distribution or sale of music in print or machine-readable form; and
- Radio communications in which the transmissions are intended for direct reception by the general public; any radio, television and cable television broadcasting undertakings; and any satellite programming and broadcast network services.
Since BlackBerry does not fit the bill as a cultural business, they are subject to the acquisition laws surrounding non-cultural businesses. Merits surrounding an acquisition of a non-cultural business are shown below - and any takeover of the company by an interest party would more than fit this definition of an acquisition.
- The acquisition of a majority of a corporation's voting shares is deemed to be an acquisition of control;
- The acquisition of less than a majority but more than one-third of a corporation's voting shares is considered an acquisition of control unless it can be established that the acquiring party will not have control in fact of the corporation. For example, a 40 per cent acquisition would not result in control if another shareholder owned the other 60 per cent and a shareholders' agreement limiting the larger shareholder's rights did not exist; and
- The acquisition of less than one-third of a corporation's voting shares is not deemed an acquisition of control.
Since the any takeover of the non-culturally defined BlackBerry is most likely going to take place and is defined as an acquisition, now we have to look into if any such takeover is subject to review. Moreover, any partial purchase of the company, such as Lenovo buying a piece is still subject to review if is meets the partial requirements above (if in the event that Lenovo buys a portion of the business).
- The value of the assets of the Canadian business;
- Whether the investor is controlled by residents of a World Trade Organization (WTO) member state;
- Whether the Canadian target carries on a defined cultural business; and
- Whether the investment is to be effected directly, through the acquisition of a Canadian business, or indirectly, through the acquisition of a foreign business of which the Canadian business is a subsidiary.
The above outlines any acts that would justify a review, a notification or a mixture of the two by the Canadian government. As we can see any direct acquisition fits the bill and would be subject to these events.
Lastly, on this four prong analysis we have the determination by the Canadian government of any non-cultural acquisition that is subject to many factors although one overall concept - the net benefit to Canada. Below is a summary of the many factors that the Canadian government weights in determining whether a proposed investment (in turn, acquisition) would be a net benefit to Canada. This portion regarding the net benefit to Canada will be explained further in the next section of this article.
- The effect of the investment on the level and nature of economic activity in Canada, including its effect on employment, resource processing, the utilization of parts, components and services produced in Canada, and exports from Canada;
- The degree and significance of participation by Canadians in the business;
- The effect on productivity, industrial efficiency, technological development, product innovation and product variety in Canada;
- The effect on competition within any industry in Canada;
- Compatibility with national industrial, economic and cultural policies; and
- Its contribution to Canada's ability to compete in world markets.
Net Benefit To Canada:
The determination on whether or not an acquisition of BlackBerry would be a net benefit to Canada is a very tricky question to answer. With regard to the first bullet point above, Canada would likely approve since an acquisition of BlackBerry to keep the company in business provides more economic activity than blocking BlackBerry's options to stay afloat. To the second bullet point, Canadians would be kept participating in the business if, and only if, the business is kept in Canada. If the business is moved to another country the only participation by Canadians would be as customers.
The last three bullet points are less black and white, as BlackBerry does not have any major Canadian based competitors and a sale would not change any policies unless they are changed in the process. Moreover, Canada's economic gain moving forward would decline in world markets due to the pure loss of a business if it is moved. Although if a buyer keeps the business in Canada and makes it more profitable then that would be a gain for Canada.
Under the Investment Canada Act, the Canadian government can deny any takeover or acquisition if the end result is not a net benefit to Canada - a very wide ranging power.
Does This Even Happen?
Canadian oversight in business is not a joke, and their power is expressed regularly. On October 18, 2013 the Canadian Radio-Television and Telecommunications Commission (CRTC) denied BCE's (BCE) move to acquire control of Astral Media's television and radio services since it was not in the public's best interest. The company was later acquired by Bell Media. Moreover, Last week Canada denied an Egyptian entrepreneurs bid to acquire Allstream's fiber optic network owned by Manitoba Telecom Services Inc.
U.S. Government's Concerns
Recently Lenovo signed a NDA with BlackBerry for a view into the Company's books - an event many other parties have also expressed interest in doing. Supposedly Lenovo wants to purchase parts of BlackBerry, to the same light that companies such as Cisco (CSCO), Google (GOOG) and SAP (SAP) wanted to take part in a piece-meal deal.
On the other side of the Canadian border, the U.S. government is concerned since BlackBerry's secure network handles millions of private government and business emails every day.
With all of the news blips signaling non-disclosure agreements and the drive to purchase part or all of BlackBerry, a key item has to be kept in mind - an acquisition or an investment by any party is subject to Canadian oversight and is not just a free-willed purchased by a party.
My mind is still set on the Canadian Warren Buffet, Prem Watsa, buying BlackBerry through the planned consortium. It takes down many boundaries since in essence, it is Canadian investment for a Canadian company staying in Canada. My personal and original take was a buyout by Prem Watsa at $7.5 billion, the number seems far off right now although this game of chess is in the early stages.