Will Fairfax Walk Away After BlackBerry Due Diligence, or Lower Its Offer?

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Two provisions in the Fairfax Financial Holdings deal to buy BlackBerry Ltd. (NASDAQ: BBRY) for $9 a share could alter the deal, or end it altogether. The more important of these is that Fairfax has until November 4 to complete “due diligence.” Such arrangements often allow buyers to drop their offer prices or even walk away from acquisitions completely. That is the largest risk as BlackBerry works to go private.

Another provision in the buyout plan would allow BlackBerry to solicit a new offer. An alternative transaction is almost impossible. First a buyer would need to believe that the badly crippled company could be turned around. Second, it would have to be seen as worth more than the Fairfax offer of $4.7 billion to risk it. And a buyer would need to take out the 10% of BlackBerry that Fairfax owns, which might prove difficult if Fairfax wants to fight another offer.

Due diligence is tricky business, because it is not entirely clear what a buyer could look for. BlackBerry sales may have fallen more quickly than they were when the company last reported earnings. Or inventory may have spiked, leaving the chance that some of that expensive inventory may never be sold. The cost to lay off 40% of the BlackBerry staff may be more expensive than the company has indicated. And it may be that those layoffs are too large for BlackBerry to mount a turnaround. Fairfax will put an army of accountants and hardware and software experts into the BlackBerry headquarters, and probably every major office it has around the world. It also will poll customers about their intentions to remain with BlackBerry.

Fairfax would not have to find much wrong with BlackBerry’s operations to have second thoughts. If it sees no alternative buyer, it could lower its offering price to $7 a share or even $6. That could be a better deal than if Fairfax decided to opt out completely. However, due diligence has been the cause of the collapse of many buyouts. BlackBerry may be no exception.

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