When institutional investors buy at a premium to the market price, usually this is a good thing. In theory it means they see value where most others don't see, and many times are willing to pay a premium in exchange for a big position. That is especially the case when the institutional investor is also an insider.
I want to remind everyone that the recent $1 billion private placement of BlackBerry (NASDAQ:BBRY) convertible debentures is convertible into common shares of BlackBerry at $10 a share. I also want to remind everyone that at the time of the placement, the debentures were issued at a 28.7% premium to the price of BlackBerry's stock.
Normally this should have been interpreted as positive news by the market (although I do admit the possible dilution is a negative factor), but nevertheless the market sold the news and today the debentures are at a 50% discount compared to the closing of BlackBerry's stock on Friday.
On Friday BlackBerry announced that pursuant to the previous transaction agreement, the company is extending the option for an additional $250 million principal amount of debentures to the buyers of the $1 billion debenture deal announced on November 4, 2013.
As the company announced:
BlackBerry has been in quiet period since the initial closing, and the extension will enable BlackBerry to provide updated financial information to prospective investors after its third quarter 2013 results have been publicly released on December 20, 2013.
Investing alongside insiders
Although at the present time Prem Watsa cannot be considered an insider -- since he resigned from the board a very short while ago -- but being the biggest shareholder of BlackBerry and having been on the board of the company for a very long time constitutes him an insider, in the sense that he knows just about everything there is to know about BlackBerry.
In addition to the 10% stake in BlackBerry, Fairfax Financial also bought $250 million of the recent offering. Again, I want to point out the premium paid at the time and the fact that he is adding to his position rather than selling.
While there is no law that says insiders can't lose money on insider trades, the truth of the matter is that insiders for the most part get it right. That according to Nejat Seyhun, a finance professor at the Stephen M. Ross School of Business at the University of Michigan, who has studied the behavior of corporate insiders for many years. He says "insiders have been correct far more often than they've been wrong".
So in the case of BlackBerry, if Prem Watsa thought the company was not worth it, or that the company would go out of business soon, I don't think he would have bought the recent offering. At the same time, he should have been a seller of BlackBerry all this time and not adding to his position. So logic dictates that if Prem Watsa bought BlackBerry at $10 a share (the debenture conversion price), he did so thinking that longer term it will be worth a lot more.
Remember, Prem Watsa is no dummy. No one with a record like his is dumb. Yes he makes mistakes like all of us, but he probably knows better than to get sentimental about any investment or company.
So if Prem Watsa insists so much on putting more money into BlackBerry, we at least have to give the guy the benefit of a doubt, since he has a much better track record and the money to prove it, than most of us.
While there is no law that says insiders always get it right, they do most of the time, because they have a much better picture of the financial condition of the company and its prospects. And while the market so far has placed big bets against BlackBerry and so far has been right, the persistence of Prem Watsa might mean that in the longer term, he might end up being right and the market wrong.
So while BlackBerry is not yet out of the danger zone, it is prudent for all those who are still betting against BlackBerry to at least reconsider, since Prem Watsa is in a much better position than most, to know what is going on inside the company and what the true value of the company currently is, and what it might be worth longer term.