<story><title>Fairfax strikes $4.7-billion deal to buy BlackBerry</title><url>http://www.theglobeandmail.com/report-on-business/fairfax-strikes-47-billion-deal-to-buy-blackberry/article14470689/</url></story><parent_chain></parent_chain><comment><author>cs702</author><text>Fairfax Financial is run by Prem Watsa, a cautious, methodical, &amp;quot;value&amp;quot; investor who has compounded Fairfax&amp;#x27;s book value by nearly 23%&amp;#x2F;year over the past &lt;i&gt;27 years&lt;/i&gt;.[1]  (Fairfax&amp;#x27;s stock price has gained 19%&amp;#x2F;year over the same three-decade period.) His approach and track record are similar to those of Warren Buffett earlier in his career -- i.e., not someone one should normally bet against.&lt;p&gt;If Fairfax is offering to pay $4.7 billion to acquire RIM, Mr. Watsa somehow must have convinced himself that the value of RIM&amp;#x27;s business exceeds $4.7 billion by a large margin.&lt;p&gt;However, to me Blackberry looks like a dying platform suffering from &lt;i&gt;anti-network effects&lt;/i&gt; (that is, fewer and fewer people use it, so fewer and fewer people want or need to use it). I don&amp;#x27;t understand how he gets comfortable with that number.&lt;p&gt;--&lt;p&gt;[1] See page 8 of Fairfax&amp;#x27;s last annual letter to shareholders: &lt;a href=&quot;http://www.fairfax.ca/files/Letter%20to%20Shareholders%20from%20Annual%20Report%202012%20FINAL_v001_o7033s.pdf&quot; rel=&quot;nofollow&quot;&gt;http:&amp;#x2F;&amp;#x2F;www.fairfax.ca&amp;#x2F;files&amp;#x2F;Letter%20to%20Shareholders%20fro...&lt;/a&gt;</text></comment>
<story><title>Fairfax strikes $4.7-billion deal to buy BlackBerry</title><url>http://www.theglobeandmail.com/report-on-business/fairfax-strikes-47-billion-deal-to-buy-blackberry/article14470689/</url></story><parent_chain></parent_chain><comment><author>JumpCrisscross</author><text>Fairfax Financial Holdings (TSX: FFH) is an $8.3 billion property and casualty insurance company. They are an acquisitive bunch, having spent $4.7 billion on deals since 2011 (37% of their enterprise value as of 30 June 2013 or 57% of their market capitalisation as of today). &lt;i&gt;All&lt;/i&gt; their acquisitions since 1997 have been in the banking, insurance or shipping&amp;#x2F;transportation spaces, with the exceptions of EFI Global (environmental services).&lt;p&gt;Their CEO, Prem Watsa, is a value investor. Fairfax&amp;#x27;s IRR is around 20% - this means Blackberry needs to yield about $840 million in cash a year to tread water. That seems unlikely. Instead, I think we will see a spin-off of the handset business and patent portfolio with a retention of the cash-flow generating service business.&lt;p&gt;What&amp;#x27;s the service business worth? It made $3.2 billion annualised the last quarter (Q2 FY 2014), $3.9 billion in FY 2013, and $4.1 billion in FY 2012. Let&amp;#x27;s assume it keeps declining at 8% a year. Let&amp;#x27;s further assume it can return at least the entire company&amp;#x27;s FY 2013 40% gross margin. Guess what 40% of $2.9 billion declining at 8% annually and discounted at 20% is worth over the next 10 years? $4.7 billion. Thus, &lt;i&gt;if&lt;/i&gt; decline can be maintained at no more than 8% while margins are maintained at 40% and the cost of capital capped at 20%, the handset business, patent portfolio, and any terminal value after 2023 are freebies.</text></comment>