Blackberry going stale
Do we see inefficiency in an efficiently regulated market?
Blackberry, whose mobile phone fortunes have seen turbulent times in recent years, has announced that their planned acquisition by Fairfax Financial Holdings will not proceed. Blackberry has instead chosen to raise $1 billion through a convertible bond sale. But that failed acquisition was probably only Blackberry’s second best option anyhow. Fairfax’s main focus is of course insurance, reinsurance and investment management – hardly a great fit to run a once upon a time industry leader. Blackberry’s best option would surely have been to secure Lenovo as a majority investor with and the remainder interest being acquired by North American private equity groups. I will explain how the interconnectedness of investors, market regulator and government likely stopped the company from pursuing its best option.
The technology industry today is a highly regulated market requiring businesses to forego high start-up costs and run significant operational expenses. Businesses today tend to grow inorganically by acquiring existing businesses either through raising debt or using existing cash, the technology industry is no stranger to this type of practice. Blackberry consists of two main business operations: consumer operations and Blackberry Enterprise Services (“BES”). As a publicly listed company, they cannot simply hand over the keys to a business operation and allow the corresponding party to drive off. Any sale of Blackberry whether by acquisition, reverse takeover or leveraged buyout will require the balanced approval by shareholders, regulator and the government. Our market economy today requires listed companies to abide by listing rules and securities laws to protect investors, a key to transparency and investor confidence. These rules and laws are enforced by the market regulator, a role different to that of the government. The government is where anti-trust and competition commissions inhibit or encourage certain transactions within an industry. Unfortunately, while Blackberry seriously considered its best option, the Canadian government told them they would not approve a Chinese takeover due to national security concerns. In this case, the federal government is concerned with allowing foreign companies to own vital electronic infrastructure, infrastructure that operates a secure network handling encrypted messages between government agencies, businesses and fortune 500 companies. This concern led Blackberry to an inevitable failed acquisition by Fairfax and left a deb-free company with little options.
An alternative should always be considered when options seem to be exhausted. Whether ideas are feasible within today’s market framework, they should be developed as a possibility to our ever-evolving market economy. If Blackberry were allowed to delist from the publicly listed market and remain on the Over-The-Counter market, the protection of investor interests would remain. This would allow Blackberry to exercise greater autonomy from the government and regulator. In turn, permitting the sale of their consumer business to Lenovo will not only be hugely profitable, it will forego huge on going costs of research and development, marketing their consumer products, investing in the development of the ‘mobile app world’ and hiring highly skilled employees. The sale to Lenovo would inject large amounts of cash needed to kick-start their BES operations and allow them to regain the dominant market share they originally excelled with.