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Does Prem Watsa know something we don’t about the future of RIM?

Prem Watsa
By Chris Umiastowski on 24 Jul 2012 11:10 am EDT
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Yesterday there were a few stories written in the business media about how Prem Watsa of Fairfax Financial, nearly doubled its stake in RIM.  Regulatory filings show that Fairfax is now a 9.9% shareholder in RIM, up from the mid 5% level previously.

For those who don't know, Watsa also sits on the RIM board of directors.  He joined the board in January of this year.  He's been called "Warren Buffet of the North", and he has quite the reputation for making brilliant market calls such as selling equities in advance of the 1987 crash, and buying credit default swaps on bonds prior to the subprime disaster of 2008.  

Given that this guy already took a large stake in RIM when he joined the board, one has to wonder what he knows about RIM's plans in order to justify his return to the trading desk to double down on the stock.  As a board member, he is privy to plenty of insider information.  When insiders buy, it is usually viewed as a bullish sign to outsiders.  

Just to be clear, please don't confuse the term "insider information" and "insider buying" with anything sinister.  Insiders are never permitted to buy stock when they have critical information about pending news that is not yet public.  But they are allowed to use their own opinions, combined with their insider knowledge of long term strategy.  And that's exactly what Watsa appears to have done.

Watsa has previously said that he expects the turnaround of RIM to take 3-5 years.  I've seen some criticism of this statement, but what he said is quite fair.  Sure, we don't really know what the mobile landscape will look like in 5 years.  At least not with any precision.     But RIM is either a survivor or they are not.  If they do survive (to thrive), why should the recovery take any less time than the 5 years it took them to collapse?  

One of my favorite investing philosophies is that people tend to overestimate short term change but dramatically underestimate long term change.  When the iPhone came out most people didn't see the kind of damage it would do to RIM.  And if BlackBerry 10 hits the nail on the head, my guess is most people are dramatically underestimating how much of a recovery it can lead to.

Obviously Watsa, who sites on the RIM board of directors and must trade during allowed trading windows, thinks the recovery is coming.

Reader comments

Does Prem Watsa know something we don’t about the future of RIM?

85 Comments

We can all think RIM will turn around...but actions speak louder than words.

RIM has only one chance with BB10 and they better make it right and have it out on time, otherwise all bets are off.

These "insiders" do all sorts of things to manipulate the markets. They play it like a Poker hand. Who is to say he is not buying to psychologically influence the market to buy and pump up the price, then when it spikes he'll return to his original holding and profit off the short-term rise?

I hope that's not the case, but who really knows? I don't, and my stocks have lost 80% of their value since I invested in RIM.

Prem Watsa, Fairfax Financial and RIM are not stupid and they are definitely not trying to deceive investors in any way.

There is a lot of scrutiny on RIM since they were already in hot water from a financial regulator perspective when they back dated options that were given to their executives.

Prem is a highly respected individual in the financial world, and has a fiduciary duty to his clients at Fairfax Financial. Everyone knows he sits on the board of directors of RIM, therefore there is no way he is using any non-public information to base his investment decisions. He is simply taking a position with a certain amount of risk, risk that Fairfax manages.

"Prem Watsa, Fairfax Financial and RIM are not stupid and they are definitely not trying to deceive investors in any way," claims SurrealCivic.

Apparently you have never worked in the financial industry including investment banking. There are plenty of reasons Prem Watsa doubled his stake in Research In Motion, many of which skate on the very cusp of legality and regulatory compliance.

OOOHHHH-not smart to be accusing guys like this with doing something illegal. He is simply a savvy investor who has never once acted in bad faith on any investment. I know-I have followed him and Fairfax since inception and have done well in my portfolio by following him. Think twice before talking out the other end of your body

Bingo. Its a toss up. Does he really believe in Rim. Or is this nothing but stock manipulation. I am thinking it manipulation as Rim will loose more of its stock value before they turn things around. So I am asking myself, if he can buy the stock much cheeper a few months from now after another bad quarter. Why now, something smells. Is he making RIM look better for a buy out or takeover. In reality he could careless what happens to Rim as long as he gets a fat return.

Nobody's getting their money back! RIMM will not get back to double-digits unless they got purchased at a "major" premium. They're only going to lose more money because Wall Street & "genius" investors like this guy want the price down to $3-$5, so they can pay a premium equal to about $$8-$10. NO ONE will value RIM any higher than that, to do so would be insane!

Andre,

For a guy from Toronto, you sure have a negative outlook about RIM. Keep in mind that RIM doesn't loose money when the stock price goes down nor do they make money when it goes up. Now they can have trouble raising capital when the stock is selling this low. However, it really is no skin off their back except they do want to try to keep the shareholders like myself happy.

David

In mid-2002, Apple's share price fell from mid-$12's to $7 in a couple of months, and their outlook was pretty bleak. I'm not saying RIMM is heading to $600 by any means, but if everyone bough on momentum the way you're suggesting the stock market wouldn't function very well.

Of course ..but the investors who make the most gains are the ones that are investing now and not waiting for the results. I'm kicking myself now for not listening to a developer here who 5 years ago told me that the iPhone is where it's going to be because of the APIs. If I had listened instead of being arrogant (in favor of RIM) I would have a lot more $$ :)

Yes, I realize it was pushed back once....I was talking about the time frame they have said now.

I'm guessing he's trying to bring down his dollar average and also that he has (correctly I would say) guessed or knows that the company will be taken over/broken up in the near future.

"And if BlackBerry 10 hits the nail on the head, my guess is most people are dramatically underestimating how much of a recovery it can lead to."

Doubtful - the OS is a very minor part of it - people talk about the two billion cashpile that RIM have - to play against Samsung and Apple (the only two players who actually matter any more) will require far more than that, you cannot get the sort of supply chain advantages both have with such a small pot of money (which is why they able to command decent margins) - I think RIM will simply run out of money trying to compete - unless BB10 devices sell tens of millions of devices in the first full quarter and there then out.

I think RIMM is a buy right now and that the stock is sure to go up.

But confidence in the undervalued stock RIMM, does not equal confidence in the much hyped - but little seen BB10 Platform.

LOL! The stock is falling like a rock & in financial terms is a "falling-knife"!! I'd really like to see YOU try to catch a falling-knife, go ahead & try! RIMM is not going back above $8, Wall Street had this stock pegged for $3-$5 the minute it hit $12. This stocks a 'dud' & the only reason people are still in, is to do what he just did: lower his overall "purchase" price to mitigate the LARGE losses he's incurred. Once the companies bought, he'll be front & centre negotiating a "premium" deal for the shareholders (try to recover some losses). Typical stock-market folly, but still everyday business. Nothing new here!! RIMM is a definite SELL!!

Andre,

It still doesn't make any sense to buy a stock if you think it's never going to go back up despite what you paid for it.

David

I've been thinking about getting into the market for a while now and I'm really leaning toward starting with RIM stock. It seems to me that this is the time to get in. Little risk if you just start out investing a little bit to see how it goes. When BB10 hits, there really is nowhere to go but up.

"Doubtful - the OS is a very minor part of it ... "

What? The OS and more so the eco-system is what people are investing in.

No one just buys an apple device because they believe apple has a lot of money. They buy it because it has applications. They buy it for the retina display. They buy it for iCloud...

They buy a blackberry because of the keyboard, because of BBM, because of Kevin...

You are assuming a big if also, that if RIM sells no BB10 then they will run out of money. But that is a big IF.

If they sell some devices, that will translate to revenue to reinvest to make more devices. Added to the the fee they get for there infrastructure, they are not going to run out of money that easily.

I'm not saying it is going to be peachy for RIM either but Windows Phone has more of a chance of ending then RIM does of going bankrupt.

Being a Microsoft developer for years, if the low adoption of WP's continue, Microsoft will get to a point where it will make more sense to try to purchase RIM and get the existing customers then to compete with them.

Microsoft has no problem throwing money to get the corporate customers. They want everyone running Exchange and Office and paying for SQL Server licenses...

You can either outsell your competition or buy them out. Right now they are trying the former...

As an OS guy myself, I'm with you on that one. The OS is a HUGE enabler! New technologies and support for new types of APIs that work well isn't possible without a great OS. QNX is that OS. RIM will have the option to turn on the real-time feature of QNX in BB10, which will enable more functionality than is present on current mobile platforms. A great platform will also attract more development environments and more development.

With so much potential in their new ecosystem, RIM would be foolish to sell now and lose all that potential.

If he's looking for a return in 2-3 years, then you know he's not counting on some kind of buyout of RIM.

What he's doing is cost averaging the original purchase.

Timing is everything, and it all about the money, on the other side theres that bit about sparrows and the lilies in the field.

Why 500 000? They have said they have 100 of the major players to announce for bb10, skype being one of them. I believe bb10 will be more of a quality not quantity platform.

RIM already has a video-chat program, it's in the Playbook.

What RIM needs to do is make Android, Windows PC and iOS versions of the Blackberry Video Chat program so people have an ALTERNATIVE to Skype for calls!

I think it will be easier for RIM to do that, than to beg Skype to make a port for BB10.

BS. 500,000 apps would have about 490,000 of then junk. Quantity isn't important. Unless you really want to have a thousand different fart apps and the like.

Even better, his name sounds like a character from an Isaac Asimov sci-fi novel. Therefore he's from the future and knows RIM is going to succeed wildly and he'll make a crap load of money.

Easy, he is expecting people to post that kind of news, so everybody will rush on RIM and make the share value artificially increase, then he will sell his stake.

Remember Facebook, what, one month ago ?

Actually, that would be illegal. Prem didn't get to where he is by making such obvious illegal moves like you are suggesting.

He is a bearish guy.
But sometimes, I like to remember "old times" when investing in companies was related to the confidence in mid/long term investment. I believe he has faith in the future.

("old jerk" rant)Now, systems are dealing with microseconds ... that's pure nonsense. (end of "old jerk" rant)

How is it possible to like what RIM's doing if they haven't released any "new" products!?!?! That doesn't make any sense, considering RIM's not actually doing anything but talking about what they're going to do. Considering the past few months, I'd be cautious listening to any promises RIM makes as far as their product release schedule is concerned. They've missed almost every date they've set for 'themselves' in the past 3-years. That's completely unacceptable, yet all I hear is how great RIM is doing from the faithful. You have a better chance of winning a horse-race, the lottery & the slots all on the same day, than RIM making a recovery in the current tech-market. It starts with the thinking & as long as RIM & all of you think every things fine, they'll never find their way out of the hole they're in. #facts

Andre,

Actually RIM has released new products, both hardware and software. If you just pay attention to the ibiased imedia, you will have missed it.

David

I think a big issue for people is that they see US share dropping very fast and assume that the same is true worldwide - it isn't.

Mr Watsa likely knows a lot more than the average bear and he also knows the large cash position gives RIM time to turn it around. Given current valuation, I suspect there is little downside left.

They'll be below that before October! iPhone 5, with NO BB10 device means they'll be treading around $3-$5, by Hallowe'en. #facts Every valuation you've read about, where analysts are "guestimating" RIM's value are ignoring a few things: 1) RIM's reported losses already happened before the report, so the numbers are here & aren't going anywhere. NO SALES = NO PROFITS = NO MONEY. #simple 2) Without hardware, the services & networks are REDUNDANT = USELESS!! 3) The patents have NO value since most are shared + the other's cover technology that will be abandoned shortly & only protects against patent-partners. Plus, while all of this is happening, RIM will be burning through cash, writing severance packages to salaried employees & spending millions on development of BB10, while paying current employees, manufacturing products & purchasing parts (that currently more expensive than what competitors [Apple] pay!) RIM'S screwed, face it!!

Oh hey buddy! Did the banhammer come down on you over at BGR? You realize that this schtick is going to play even LESS well on CrackBerry, right?

Maybe he sees value. RIM is cheap. Depending on what you think the patents and break up value of the businesses, RIM probably is worth more broken up into bits rather than as it is now as valued by the market.

Maybe he's just making a bet. Ever wonder why Wall Street people never show up on Page 3 holding the novelty cheque after winning $20million in the lottery? It's because They're on Page 1 of the Wall Street journal after winning $2 billion betting against sub prime mortgages.

Or maybe he knows as much as John Paulson thought he knew last year when he doubled down on Sino Forest.

Comes down to a rich guy making a bet but it's still a positive sign.

He already has a sizable stake in the company and when you do - you take "stock" of your position from time to time and when it's this far up your $#@ you decide - I liked it at $26 do I love it at $7? His answer was yes. Actually he served 2 purposes. Imagine where the stock might have gone if he didn't take that position?

Like it or not he's in it for the long run so he makes himself out to be a long term investor now and says the things you would expect someone with nearly 10% of the company to say. This is not a trade from strength at this point. I know he has some like this in the portfolio to brag about - but every trader has some painful ones they don't talk about at press conferences and parties as well. You are not human if you don't. Even Buffet has trades that didn't quite work out.

"Averaging with confidence" is what I believe the most (simplistic and) probable explanation.
Wasta is long and the signal I get is "we're not giving up, I agree with strategy and believe in my company so I buy again" ... and I like that. "I support RIM I buy share" still remains my position. Childish ? Yes, ok, name it. But let me have some beginner luck then ;).

sure,
He will make good money by selling stocks at right time..
he is really good at this...
RIM or technically superb BB is nothing for him... think of all the money you can make..

Pfft, at the current price, Prem could own the entire company, it's a drop in the bucket to him. He's allowed to do whatever he pleases with his money, I don't think that if he actually managed a hedge fund for his clients, he would dump their money into RIM. The company is in a bad position right now, he is one of very few people going long on RIM, and if RIM does make it through, they have Prem to thank.

As a board member he certainly knows more than the average shareholder.
BUT.
At current stock prices you just can't lose, that's his view. If BB10 succeeds or bombs and RIM is forced to disband you just cannot lose.
That is the first safeguard he has. Then there was tlk of him attempting to lower his average share price.

He could just as easily be increasing his stake so that he can start agitating for the liquidation of the company. It's bullish for the stock of the company, but not necessarily for the company as it exists now.

A lot of pessimism in the comments.

"Watch out! He will rip RIM apart into pieces!"

I think Prem Watsa believes all people who use simple flip phones who are moving to smartphones will get to use a BB first. He also believes in recovery with BB10 in the competitive North American market.

So, yeah, probably in 3 years, RIM will be back to $20+ a share. However, it will not go back to its highest value unless they do something revolutionary, AGAIN.

Nothing like closing out a short at just below 7. Still think the stock has room to drop, but its downside risk is limited in the short term pending no more announced RIM flubs re BB10. Might actually be a time to buy...but based on RIM's track record, I'm not that brave.

He simply has money to burn and is not afraid of taking risks if it doesn't pan out he will simply invest elsewhere.

Anyone who invests in RIM (or for that matter any stock) on this type of news deserves to lose money and at the same time prove Darwin was right.

You're still a clown. What did you say about Apple when it was down and out? (besides that was then, this is now)

"When the iPhone came out most people didn't see the kind of damage it would do to RIM."

I don't think the iPhone has done that much damage to RIM. The iPhone is a premium priced product and while it has made significant inroads into the growing smart phone market in the US and beyond, there is an even greater growing market for lower priced devices that RIM could have shared - with perhaps a smaller overall share but still with increasing sales.

It is Android that has killed RIM's share and specifically Samsung. Samsung is killing everyone (including to some extent Apple), and the combination of their aggressive pricing and lack of license fees means US carriers make far more money per Android than per BlackBerry - hence the push towards Samsung Android devices.

Which makes patent disputes such as Google vs Oracle (more or less done) and the recent NTP deal intriguing.

Given RIM has been paying license fees to NTP when others have not, it will be interesting to see the details of the deal (assuming they're ever leaked) and compare RIM's agreement.

Decreasing margins for other manufacturers combined with RIM's new product portfolio could make for better numbers for RIM next year.

he likely knows an acquisition is in the works and can get a stock pop when rumour mill flies. most stocks experience an insider pop right before a public announcement. I actually thought that is what explained the stock pop of a week ago...

He obviously knows something is going on. To double your share total means something is happening. I hope it is something good in the sense that something is telling him the value to RIM is there and that BB10 is going to kill it. If it is bad, it would mean BB10 is delayed or fails to stem the tide and I'll be forced to look at an Android, Windows or god forbid iphone as my next device. Please succeed RIM.

_______________________________________________

The difficult, we do immediately. The impossible takes a little while longer.

Okay, when you guys are talking about OS, Stock, Hardware, etc., this to me is a bit off topic as to if RIM is gonna "make it" or not. To me its all about the end user. If the end user likes it then it will be a hit. As a matter of fact, if the end user has to have it, then it will rule....just like I-Phone is now.

EXAMPLE: My daughter is 13. She knows nothing about stock, how much money any one has, OS's, SQL, outlook, BES, NOTHING. ALl she knows is...."She has to have an I-Phone". When she works and saves her money up, then she will have one. BAM, one more sell for APPLE. Also, dont start saying...."Blackberry is not for kids" becuase i know plenty of adults that have bought an I-Phone for that same reason....they just HAD TO HAVE ONE. Reasons may vary, but when a company gets the general public (insert percentage of American buyers here) then it will be on top.

My point being. RIM will have to creat an "experience" if they want to be on top again. Just like they did when they were ruling the world because of BES, etc. They will have to make it a must have. They will have to make it common water cooler talk. Not just pump a bunch of $$$ on TV ads, and WSJ ads.

Cant wait for BB10 personally, and all i really want is to never ever have to go without my BLACK-BURRY. I AM AN ADICT....

Well at least he has a vested interest in the company, and is doubling down. Maybe Fairfax should just work out a deal take it private.

The smartphone feature set is so similar accross product lines now that very little real differentiation is left, save the latest greatest processor or HD display yada yada for this week. That leaves little room for major product advances such as RIMM needs to be a player in US market again. To me what little of BB10 I have seen just gets them current, at best, in the market by 2013. They just spent too much time diddling around with OS/product development and orphaning their current phones in the process. I think the next big advance will be automated wheelbarrows to carry smartphones around in as they become more gargantuan. Still love the 9700 for that reason, but switched over to 10 cents a minute with AT&T and the BB won't work for mail/data using just wifi (at least I could not get it wo work without a BB data plan) so ended up using my 3gs which gets all but txt which I do't use anyway. I wish RIMM luck.

I just submitted an article to an investing web site that talks a little bit about RIM. I am amazed by how people (even here) don't get it.

Prem Watsa is obviously a user and fan of BB devices. Nevertheless, Prem should stick to insurance, financial services and equity markets. Things, he truly understands. In technology, he is out of his league.

There are huge risks in investing in RIM right now. No guarantee BBOS 10 will be a success with consumers.

I would rather wait and see. Rather than trying to find the bottom on RIM, I would rather ride the upward momentum in RIM if BBOS 10 is a success. Prem, the trend is your friend. The market humbles Pros & Joes. Right now Prem is being humbled by the market.

Often times when a company is on the verge of a takeover it is beneficial for share holders who own the company that is being bought out. I hope this is not the case, as I would love to see RIMM make a 180 turn around. But realistically there are too many unknown variables for Prem Watsa's double down. Time will tell....

Wouldn't that be great if BB10 was a success and the stock went from $7.00+/- (today) to $70.00 a year from now.

Okay let's be real here. Prem is an insider. He has a reputation for being a savvy investor. He is committed. He is either delusional, lost his objectivity and taking this personally or he knows more than the rest of us mullets. You decide. In any event he has made a huge bet and unfortunately because he is averaging down it is not seen as a significant vote of confidence. He has however taken more shares out of the public float and because RIMM is designated as a hard to borrow stock at most firms that is good. If RIMM really wants to hammer the shorts they would put their money where their mouth is, leverage up at these stupid low interest rates and do a massive buyback. That would be the mother of all short squeezes and bring the stock back to where it should be trading anyway, imho mid teens. RIMM needs to get off the ropes and start swinging and act like their assets have value.

If I were advising RIMM I would take the company semi-private. I would leverage up using for example the real estate assets as collateral, do a massive buyback and take out more of the public float. The insider's and long term investors would hold their shares and the shorts would get hammered and go away. Thor hammer the shorts.

RIM is the Golden Goose that laid the Gold Eggs. This goose is a little under the weather. Prem Watsa knows this, and BB10 will be the First Golden Egg. More to come.

Prem has a lot of reasons for increasing his stake. The most obvious is that RIM's share price is below the price the company would receive if it ceased operations tomorrow or any time in the next couple of years. The patents alone could be worth the share price. Two analysts say they could be worth $10 billion, for a sp of $18 (National Bank, ThinkEquity), though the consensus estimation is $2 to $3 billion ($4 to $6 per share). Add in the value of everything else, including the real estate, etc., and it's hard not to come up with a break-up value of at least $10.
A second big reason is control. Watsa is getting into a position where a hostile lowball takeover will be harder to do. All roads regarding big moves by RIM or big moves by companies wanting a piece of RIM will have to go through Fairfax.

That's a brilliant win-win move by Prem. Not only does the investment show to the market a strong vote of confidence in RIM's transition, it also allows RIM to focus on and complete the transition by making a hostile takeover or push to break up the company by activist shareholders much less likely. By averaging down, he can reap the fruit from the transition that much sooner as well.

I think he knows what just about anyone who has used Tablet OS 2.0 knows... that Tablet OS is excellent, the PlayBook hardware is excellent, and a powerful handheld device / mobile phone running an advanced version of this OS will impress consumers, analysts, investors, developers, and be a great success.

The people who DON'T know this, who pose "Will RIM survive?" type questions in the media are those that haven't used the PB hardware or Tablet OS and are willfully ignoring the praise heaped on the SDKs, the APIs, the OS, the Devices, and RIM's developer relations efforts, and when you say "but just LOOK AT THE DEVICE!!!" they waive their hands and turn away to write another uninformed criticism to get more clicks... but now that THAT isn't interesting any more, maybe we'll start seeing "RIM's new platform getting rave reviews, indicate a strong turnaround is on the horizon...". Well, those articles will start coming when the "journalists" have bought their shares in RIM.