BlackBerry could face Feds over encryption assets, national security concerns

The encryption technology that helped build Canadian smartphone maker BlackBerry into a global player is likely to be the centre of a review from the federal government, if any foreign takeover offers emerge.

Treasury Board president Tony Clement said Tuesday that national security interests will be considered, but that Ottawa is watching from the sidelines as BlackBerry shops its assets to technology companies around the world.

Clement stopped short of saying what would be of particular focus for officials.

“I think we’ll let the marketplace respond,” he said at a Canadian Government Technology event in Ottawa.

“We have a role to play obviously, which involves national security, and making sure that what occurs is in the public interest.”

While analysts have frequently discussed how BlackBerry (TSX:BB) has fallen behind in the consumer market, one area that is often overlooked is the company’s encryption technology, which is especially important for business customers.

The Waterloo, Ont., company has built its reputation on protecting highly-sensitive information from being decoded for international or corporate espionage. It has said it doesn’t store or have access to the encrypted data.

“The encryption is probably some of the most rarefied science you can imagine in the telecommunications space,” said Carmi Levy, an independent telecom analyst.

“Those secrets are guarded very closely.”

BlackBerry has run into numerous challenges over its encryption technology. Countries such as the United Arab Emirates, Indonesia and Saudi Arabia pushed to ban some of the device’s services because governments can’t monitor content as it passes through the system.

India also pushed for BlackBerry to provide access to its BlackBerry instant messaging service.

Their concerns centre around national security, since traffic over BlackBerry’s instant message service is extremely difficult to intercept and monitor.

BlackBerry also owns a series of data centres which serve as hubs for transferring information through the company’s servers.

All foreign takeovers are reviewed under the Investment Canada Act to ensure they are a “net benefit” to the country and passes a national security test.

Last month, BlackBerry received a conditional takeover offer from Fairfax Financial (TSX:FFH), BlackBerry’s largest shareholder, worth $9 per share. The offer values the company at US$4.7 billion and Fairfax has said the consortium of unnamed buyers would be composed entirely of Canadian investors.

Fairfax aims to sign a definitive agreement for the transaction by early November.

However, other interested buyers are also circling the company, according to reports from various media outlets. The international tech names possibly interested run the gamut from Google, Cisco and SAP, to Microsoft and Cisco.

BlackBerry reported dismal earnings after sales of its new line of BlackBerry 10 phones tanked. Last week, it said it expects to face costs of at least US$400 million before the end of May 2014.

The expenses are tied to the severance payments for the layoffs, as well as reworking its smartphone lineup and other changes to its manufacturing, sales and marketing operations.

This week, it announced that it was laying off about 300 head office employees as part of a previously announced cost-cutting plan that will reduce its workforce by about 40 per cent.

BlackBerry began handing out the notices on Monday, though the cuts have been ongoing across its global operations for several weeks. The company plans to eliminate 4,500 jobs over the coming months.

Once the cuts are complete, BlackBerry will have cut more than 7,000 employees since 2011, a steep decline from a total staff that once neared 20,000.

Clement said Waterloo is “brimming” with bright technology thinkers, and he was sure new innovative Canadian products would emerge in the wake of BlackBerry’s troubles.

“We’re all very hopeful they will get through to the other side of what will probably be a restructuring of their mission and their product, whatever happens,” he said.

“It’s a Canadian product, we have some pride in that,” he said.

BlackBerry shares ended Tuesday three cents higher at $8.23 on the Toronto Stock Exchange.

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