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BlackBerry management reportedly have rejected several bids, want to finish growing the company first

With sales of certain BlackBerry, Ltd. (TSE:BB) handsets (namely the BlackBerry Classic) heating up and with the QNX OS dominating the automotive infotainment market where it holds over 75 percent market share, BlackBerry CEO John Chen has the veteran devicemaker showing unexpected signs of life.

I. Deal?

Still it came as somewhat of a surprise this week when reports surfaced that Samsung Electronics Comp., Ltd.'s (KRX:005930) (KRX:005935) representatives had met with the veteran Canadian phonemaker to explore the possiblity of an $6.5-7.5B USD acquisition.  That would place the per-share value at $13.35 to $15.49 USD (CAD$15.96 to CAD$18.52) per share, a sizeable 38 to 60 percent premium premium over recent trading prices of around $9.50 USD (CAD$11.35).

Shares of BlackBerry have jumped to CAD$15.00 (~$12.50 USD) at the market close on Wednesday on optimism that the report might prove prophetic.
Samsung and BlackBerry

BlackBerry issued a brief statement in response to the report, writing:

[We are] aware of certain press reports published today with respect to a possible offer by Samsung to purchase BlackBerry. BlackBerry has not engaged in discussions with Samsung with respect to any possible offer to purchase BlackBerry. BlackBerry’s policy is not to comment on rumors or speculation, and accordingly it does not intend to comment further.

That sounds pretty definitive.

BB Classic and GS 5
The BlackBerry Classic [left] is a surprise hit and a hot seller alongside Samsung's Galaxy S5 [right].

But it's possible that Samsung has indeed had some contact and made some sort of formative offer that BlackBerry coyly considers too informal to term "discussions."

II. Why a Deal Might Make Sense

The cornerstone of any deal for BlackBerry would likely be its patent warchest.  The veteran firm has roughly 44,000, according to Reuters.

BlackBerry Patents
BlackBerry (formerly RIM) has been steadily gaining patents, and today holds around 44,000.
[Image Source: Chipworks]

Such deals are not uncommon.  Google Inc. (GOOG) spent roughly $12.5B USD in late 2011 to acquire Motorola Mobility, a deal based heavily on the devicemaker's stockpile of 17,000 patents.  That deal also illustrated the tricky side of patent-driven acquisitions, as the portfolio proved weaker than expected.  Google still owns most of the patents, but it eventually sold Motorola to China's Lenovo Group, Ltd. (HKG:0992) for $2.91B USD -- a substantial loss.

Other patent deals haven't been quite that pricey.  Microsoft Corp. (MSFT), Apple, Inc. (AAPL), and several other companies scored 6,000+ patents for $4.5B USD at auction during the bankruptcy of Canadian telecom firm Nortel Networks.

This patent portfolio was weaponized under a shell company -- the Rockstar Consortium -- which has successfully squeezed rivals, including Google, into settlements rumored to cumulatively be in the billions (a couple hundred million per company).  With revenue from ongoing licensing, Microsoft and Apple may actually turn a profit on their purchase, as well as having gained a powerful anticompetitive tool to strike mobile holdouts with.

Aside from the patents, BlackBerry's enterprise presence would be an attractive addition to Samsung's own enterprise efforts.  Samsung has been trying to push enterprise users to embrace its KNOX solution -- a secured version of Android Linux -- but it currently trails Apple's iOS in new adoption.  BlackBerry -- diminished as it may be -- is still a powerful player in the enterprise space.  Having it onboard could give Samsung the enterprise credibility it needs to be a true threat to Apple in the enterprise space.

QNX Automotive is more of a wildcard, but in some ways this could fit with Samsung's vision.  Samsung Electronics and other parts of South Korea's Samsung conglomerate are rumored to be eyeing the electric vehicle market.

QNX hegemony

Speaking of QNX, the mobile variants of BlackBerry's operating system could also prove attractive to Samsung as a ready-built proprietary alternative to Google's Android.  Samsung has long looked for an escape plan in the budget space in order to avoid paying a cut of advertising and app revenue to Google that it currently does with Android.  

BB 10.3

The open source Tizen Linux project is Samsung's current answer, but the QNX-derived BlackBerry 10.3 OS could prove an even better alternative, or perhaps be used in a two pronged strategy across Samsung's low-end smartphone portfolio.

III. No Deal

On the other hand, there's many reasons to believe such an acquisition won't happen.

First of all, Samsung and BlackBerry are partners in the enterprise space already, having announced in Nov. 2014 that BlackBerry Enterprise Server (BES) 12 would be leveraged to manage KNOX devices.  It's possible that the BES12 deal was the true reason behind whatever meetings were observed and that the entire purchase rumor was the result of confusion.

BlackBerry Knox

Even if Samsung truly is interested in purchasing BlackBerry, there's plenty of reasons why it's unlikely to happen.  Canada's Globe and Mail reported that BlackBerry had rejected multiple potential buyers based on its belief that their bids undervalued it at a time it was returning to growth.  The report states:

Sources close to the company, which is based in Waterloo, Ont., said no sale process is in place and the fallen smartphone maker will stick with a multiyear plan that includes introducing new products and services aimed at corporate and government users. These sources said the board feels the prospective bids, some of which value the company at more than $7-billion, fall below BlackBerry’s potential value.

"This is not a company for sale," one person familiar with the firm said.

...

A handful of other companies, mostly foreign, are believed to have approached BlackBerry, which has rejected all advances.

Interesting the report indicates that most expect BlackBerry will eventually be sold -- just not yet.

Two men have reportedly stood in the way of acquisitions.  First up is BlackBerry's current CEO, John Chen, who took over in Nov. 2013.  Second is Prem Watsa, the billionaire chairman of Fairfax Financial Holdings Ltd. (TSE:FFH), who is BlackBerry's largest shareholder with an estimated 17 percent of shares.  Both Chen and Watsa reportedly are pushing shareholders for patience and to not look for premature payouts while the company executes its rebound strategy.

Prem Watsa
Prem Watsa, Chairman of BlackBerry's largest shareholder, Fairfax Financial Holdings, is one skeptic of an acquisition at present. [Image Source: Canadian Business]

A final hurdle that companies will have to face when and if BlackBerry's leaders do endorse a sale is the issue of government regulation.  Many of the potential bidders -- including Samsung -- are foreign.  Given BlackBerry's prominent role in the government IT space in both Canada and the U.S., a bid would face scrutiny both under the Canada Act of 1982 and by the Committee on Foreign Investment in the United States (CFIUS) (part of the U.S. Treasury).

Chinese bidders reportedly have already been warned that they might be disallowed from purchasing BlackBerry due to security concerns.  Lenovo was reportedly seriously considering a bid in 2013 for BlackBerry (then RIM), but was advised not to continue its pursuit via hints dropped by Canadian regulators.  Lenovo's exit triggered the Fairfax investments which brought John Chen onboard as BlackBerry's new CEO.

BlackBerry CEO
BlackBerry CEO John S. Chen reportedly prefers a more patient approach that involves completing the rebound before any sale. [Image Source: Sybase/SAP]

In other words, BlackBerry is expected to be sold to somebody, but it's going to take a while before Chen and Watsa are willing to sell and perhaps even longer before they find a buyer government regulators are comfortable with.  According to analysts interviewed by Globe and Mail, it's unclear whether the Canadian government would be comfortable with a Samsung purchase, even if the rumor did become reality at some point.

Sources: BlackBerry [press release], Reuters, Globe and Mail





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