After a year in which almost everything went wrong for BlackBerry Ltd., the smartphone maker emerged Monday from a failed auction with a new CEO, new cash and, perhaps, a new lease on life.
Investors punished the company after its largest shareholder, Fairfax Financial Holdings Ltd., abandoned its attempt to take over the business for $9 (U.S.) a share. The stock fell 16.4 per cent to $6.50 in trading on the Nasdaq market in the United States..
Instead of proceeding with a buyout deal, Fairfax and a group of unnamed investors – which sources say includes a Middle Eastern sovereign wealth fund – agreed to pump $1-billion into the smartphone maker, giving it more money to work with as it tries to arrest a downward spiral in sales and market share.
That move ended weeks of speculation that the conditional Fairfax takeover, announced Sept. 23, was falling apart.
A second group, led by BlackBerry co-founder Mike Lazaridis and private equity firm Cerberus Capital Management, came forward with a highly conditional takeover offer during a dramatic weekend of negotiations that also resulted in the departure of Thorsten Heins, who has been BlackBerry's chief executive officer since early 2012.
BlackBerry's board appointed technology executive John Chen as interim CEO and executive chairman while it looks for a new leader.
Mr. Chen rose from modest beginnings as a poor immigrant from China to become one of the most accomplished Chinese-American executives, executing a successful turnaround of Silicon Valley database software firm Sybase Inc.
Sources familiar with the negotiations say Fairfax chairman and CEO Prem Watsa insisted on Mr. Chen's appointment as a condition of the $1-billion financing. Fairfax is putting in $250-million.
Mr. Chen will continue to live in California and BlackBerry has agreed to let him use a company jet to commute to and from BlackBerry's home city of Waterloo, Ont.
Mr. Chen's accomplishments, Silicon Valley connections and familiarity with the corridors of Washington arguably give BlackBerry the leader the company could have used instead of Mr. Heins, who had been the hand-picked favourite of Mr. Lazaridis after leading the company's hardware division.
"He's got an outstanding track record ... and that's what you needed at this point in time," Mr. Watsa said in an interview.
Mr. Chen said: "I appreciate that these are challenging times and I'm no stranger to uncertainty around the future of a company. It's natural for businesses to go through ups and downs, but with the right financing, management and strategy in place, it's amazing what you can achieve."
With the financing deal, BlackBerry took itself off the market, stranding a rival consortium that included Mr. Lazaridis, Cerberus and chip maker Qualcomm Inc.The group put forward a bid on the weekend, but it was conditional on more due diligence. A third bidder, Chinese computer maker Lenovo Group Ltd., was also interested. But sources familiar with the process say that Lenovo knew that any bid would run into stiff opposition in Ottawa, where the federal government has made it clear an offer by Chinese interests would not be welcome.
Mr. Watsa hadn't intended to lead a BlackBerry takeover when he doubled down on his company's investment in early 2012 and joined the board. At the time, he believed the company could engineer a successful turnaround after steadily losing share in the global smartphone business to Apple Inc. and phones powered by Google Inc.'s Android operating system.
But Mr. Watsa and Mr. Lazaridis found themselves at odds with Mr. Heins on several occasions. A source close to the board said the two were against the company's decision to publicly disclose it had hired JPMorgan and RBC in spring 2012 to lead a strategic review, believing that it sent the wrong message and would hurt sales. Later that year, Mr. Lazaridis opposed a decision by Mr. Heins and two of his senior executives to launch an all-touchscreen version of the company's BlackBerry 10 smartphones first, instead of a version that includes its signature keyboard.
Mr. Lazaridis left the board this past spring but Mr. Watsa stayed on – until the board decided to again explore strategic alternatives in August. He left to launch a bid of his own.
Talks heated up in mid-September after BlackBerry disclosed poorer-than-expected second-quarter results. With the stock in freefall, the company hastily announced a conditional deal with Fairfax.
But the due diligence process was revealing for Mr. Watsa. He was "a little more optimistic than he should have been about investment support" for his planned buyout, said one person familiar with the discussions. He had not realized just how dire BlackBerry's results were until his advisers took a closer look at the company's books.
They told Mr. Watsa it would be a mistake to saddle BlackBerry with billions in high-priced debt as it headed into a stretch of several difficult quarters where it would bleed cash and undergo a challenging business transformation . That would make it difficult to meet its obligations to lenders, they felt. "People started to realize it was going to be very complicated to fix BlackBerry," said one person familiar with the negotiations. "There was too much business risk."
As Fairfax gained more information about BlackBerry's financial condition, the discussion shifted from a buyout to a new capital investment that would give the company time to stop the rapid erosion of its business, while allowing investors to protect their investment.
"They said there was a lot of assets, but a leveraged buyout with ... high-yield debt was not appropriate, and we agreed with it," Mr. Watsa said, adding that it was important to end the auction because it was hurting the company's business. He denied reports that he had difficulty finding financial backers, and dismissed the negative investor reaction Monday.
"I've been in the market for 40 years," he said. "If you decide to make a judgment on what the market thinks every half-hour, that would be very inappropriate."