The arrival of the man known as “the Warren Buffett of North” on Research In Motion’s board this week offers a ray of hope to the BlackBerry maker’s impatient shareholders after their disappointment that an insider was named new chief executive.
That’s not to say the reclusive Watsa – who heads Fairfax Financial, now RIM’s fourth-largest shareholder – has a reputation as a turnaround artist who will agitate for radical change at the struggling company.
But his 2.25 percent shareholding and new role as director suggest Watsa sees real value in the withered share price, even though some say the company has fallen hopelessly behind its rivals in the hyper-competitive smartphone and tablet markets.
Based from the Indian-born Canadian’s track record, fellow shareholders have good reason to be optimistic.
“Prem is attracted to companies that are out of favor and unpopular with the market,” said Todd Johnson, a portfolio manager at BCV Asset Management in Winnipeg, which holds Fairfax bonds. “He likely believes RIM is salvageable and that the market is unfairly punishing the stock now.
His investing acumen has helped shares of Fairfax Financial, technically an insurer but also his investment vehicle, rise more than 100-fold in just over 25 years. Watsa is chairman and CEO of Fairfax and controls its voting shares.
Watsa’s appointment to RIM’s board was part of a head office shuffle in which Mike Lazaridis and Jim Balsillie gave up their shared chief executive role to Heins, a company insider.
RIM investors, who have watched their stock drop 84 percent in the last three years, sent the shares down sharply after the change in leadership was announced.
They’re concerned that Heins, with his close association with the pair who presided over RIM’s swoon, may not have what it will take to reverse the decline. Heins reinforced that impression when he said he saw no need for a seismic shift at the BlackBerry maker, even though its market share has tumbled.
BUFFETT OF THE NORTH
Watsa started receiving comparisons to Buffett – the best-known proponent of investing on the basis of a company’s value – back in the 1990s. He’d already shown his investment chops by selling stock ahead of the 1987 stock market crash and buying Japanese puts – or rights to sell stocks at guaranteed prices – ahead of the Tokyo market’s collapse in 1990.
But it was his call on the U.S. mortgage crisis that cemented his reputation as a savvy investor. Watsa began raising alarms on the U.S. mortgage industry in 2003, and Fairfax began selling or hedging its equity holdings, and buying credit default swaps that it later sold when the market began to collapse. A CDS enables the holder to be compensated in the event of a loan default.
The move initially didn’t pay off, as stock markets churned higher in the mid-2000s. But when the market crashed in 2008, Fairfax notched a profit of $1.5 billion on the back of a $2.7 billion investment gain.
In late 2008, with markets still reeling and other investors licking their wounds, he started to plow money back into equities, notching another strong year in 2009.
Since then Watsa has changed gears again, hedging the company’s equity portfolio in 2010, and making more contrarian investments such as buying a 9 percent stake in troubled Bank of Ireland last year.
“He’s gotten very very strong investment returns, I don’t think you can argue with that,” said one portfolio manager who holds RIM shares.
“Whether he’s being brought on the board to support his existing equity positions or maybe ascertain whether value is there for a potential takeover and what that level would be at, I think there’s a lot that can be taken from his being added to the board,” said the manager, who requested anonymity because of his firm’s policy on speaking on the record.
To be sure, not all of Watsa’s moves have been golden. Fairfax was forced to write off most its investment in Winnipeg-based media company Canwest in 2009 as the company filed for bankruptcy protections.
It also wrote down a significant investment in publisher Torstar in 2008-09 and took losses on its holding of forestry company Abitibi Bowater.
Born in 1950 in Hyderabad, India, and trained as a chemical engineer, Watsa has maintained a public profile that has at times bordered on the reclusive since he took over Fairfax in 1985. For his first 15 years at the company, he barely spoke to a reporter, and only started holding investor conference calls in 2001.
Fairfax has generally not been known as an activist investor, but Watsa has hardly shied away from a fight, launching a $6 billion lawsuit against a group of hedge funds in 2006, accusing them of conspiring to the drive the company’s shares down so they could be shorted. A short position enables an investor to profit when a stock drops.
With a board seat, Watsa will have a prime position to make sure his RIM investment is a winner.
“He sees the value in this company, he sees where sentiment is, he sees where the asset value is and the cash value is and he sees the strategy. By joining the board he’s giving a vote of confidence and perhaps can have more hand in overseeing this transition,” said Matthew Thornton, analyst at Avia Securities in Boston. “That doesn’t mean it’s going to work.”
($1 = 1.0121 Canadian dollars)
(Editing by Frank McGurty)
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