[This is the second story in a two-part series on Silicon Valley's emerging patent war]
The auction of several thousand Nortel patents in June for $4.5 billion to an Apple-led consortium that included Microsoft, RIM, Ericsson, EMC, and Sony—aka “Rockstar Bidco”— may have profound consequences for companies that never bid a nickel.
The Financial Times, heralding the “Great Patent Bubble of 2011,” cited new pressures on public companies, including Motorola Mobility, Eastman Kodak, VirnetX, and InterDigital, to take a fresh look at selling off patents.
In addition, the Nortel auction has fundamentally altered the expectations of private companies and individuals that own patents. Reaching out of the coffin of bankruptcy, Nortel’s not-quite-dead hand appears to have dramatically shaken up the intellectual property (IP) marketplace.
Public Markets Place Premiums on Patents
News of the Nortel auction’s June 30th outcome and of Google’s continuing efforts to acquire patents from other companies magnified InterDigital’s market capitalization immediately. Its stock rose by more than 15 percent between June 29th and July 1st. As AP reported, InterDigital “got a lift from the successful $4.5 billion auction of Nortel's patents.” But that was merely the prelude.
Just days later, on July 26th, InterDigital announced new actions against perceived patent infringers. It had filed both a complaint with the U.S. International Trade Commission against Nokia, Huawei Technologies, and other companies, as well as a parallel patent infringement case in federal court in Delaware.
Investors’ interests in patents also drove Motorola Mobility’s stock higher. In a July 20th 13D filing, Carl Icahn reported discussing with Motorola Mobility that the company “should explore alternatives regarding its patent portfolio… which is substantially larger than Nortel Networks' and includes numerous patents concerning 4G technologies….”
Wall Street took note. Motorola Mobility’s stock surged by more than 10 percent on July 21st, only to give up gains the following week. In response to Icahn’s SEC filing, the company stated “it has one of the strongest and most respected patent portfolios in the industry with over 17,000 patents and 7,500 pending.”
Outside the wireless sector, Kodak declared on July 20th that it might put more than a thousand digital imaging patents on the block—about 10 percent of Kodak’s entire patent asset base.
“Given recent trends in the marketplace for intellectual property, we believe the time is right to explore smart, opportunistic alternatives for our digital imaging patent portfolio,” reads a Kodak press release. Then, in the same breath, the company hints that they are initiating new patent infringement lawsuits. “Kodak will continue to pursue its successful patent licensing program as well as all litigation related to its digital imaging technology.”
On August 1st, the central role of Kodak’s patents in its long-term strategy became even more apparent. In another statement, Kodak disclosed that its board had “adopted a Net Operating Loss (NOL) Shareholder Rights Agreement…” that was intended, in part, “to maximize the company's ability to explore strategic alternatives related to its digital imaging patent portfolios.”
On August 2nd, the Wall Street Journal reported that a key Kodak IP asset is being offered for sale by the pioneering photography company. It turns out this particular patent, for previewing photographs, is at the center of a lawsuit against Apple and Research in Motion, maker of the Blackberry. Securing a patent already being used in a lawsuit against Apple and RIM might be intriguing to, say, Google.
VirnetX Holding Corporation shows some of the extremes to which investors will go in assigning value to patents held by public companies. VirnetX, based in Scotts Valley, develops communications security software and technology. Changes in VirnetX’s valuation suggest that investors sometimes place special value on public companies that successfully flex their IP muscles in court.
At the beginning of 2010, VirnetX’s share price was about three and half dollars. After a jury awarded VirnetX $105.75 million in March 2010 in one patent infringement case it brought against Microsoft, VirnetX filed a second lawsuit against additional Microsoft products, including Windows 7, just a few days later. On May 17, 2010 the Redmond-based software giant agreed to pay VirnetX $200 million as part of a settlement, and VirnetX’s stock closed above six dollars.
Thereafter, VirnetX made repeated trips to different courthouses. It filed a new infringement lawsuit against Apple and other companies on August 11, 2010. It sued Siemens and Mitel on January 12, 2011. And it brought the iPad 2 into the pending case against Apple and others on April 5, 2011. By June 30, 2011, the day the Nortel auction concluded, VirnetX’s stock had soared to over $28 a share.
Seeking Alpha explained the ascent of VirnetX’s stock price with reference to some of the same wireless technologies that had attracted attention in the Nortel auction. “VirnetX contends its patents may be requisite for some of the 4G LTE security specifications.” On July 11th, VirnetX’s share price ascended to nearly $40, before dropping back to below $30 by early August.
The volatility of VirnetX’s stock illustrates the dependency of its share price on its patents’ perceived value. According to Yahoo! Finance, as of July 31st, VirnetX had a price-to-sales ratio of over 20,000 and very few full-time employees, but it still sported a market cap of more than $1.5 billion. Based upon VirnetX’s March 23, 2011 corporate backgrounder and its recent press releases, on July 31st, VirnetX may have had fewer than 30 U.S. and foreign patents, putting it in the top tier of public companies when valued on a per-patent basis.
Palo Alto-based Hewlett Packard, which has been a top-15 patent holder for the last decade, has so far remained outside of the fracas, but has been quietly cashing in on some of its patents, including nine sold last year to Facebook.
Sony and Microsoft, however, both members of ‘Rockstar’, are on the top-15 list.
Nortel Auction Unleashes Private Expectations
Public companies weren’t the only ones whose valuations have been transformed by the Nortel auction. While the effects on large companies can be inferred from fluctuations in public share prices, ascertaining the impacts on private companies and individuals that own patents requires knowledge of markets that are less open to inspection. IP brokers and advisors have special expertise regarding the ways in which the multi-billion dollar price offered by Apple and its allies is reshaping private patent transactions.
The bidding has taught patent owners to expect the unexpected, particularly when it comes to IP rights that can tilt the playing field in huge, growing markets. The 500 percent disparity between Google’s $900 million "stalking horse" bid and Rockstar’s winning $4.5 billion offer suggests that even the largest companies aided by armies of analysts have considerable difficulty predicting the prices of highly desirable patents.
“No one saw this coming,”said Ron Laurie, Managing Director of Inflexion Point Strategy, an intellectual property investment bank and advisory firm. “No one predicted the magnitude of the bidding war.”
"Before the Google stalking horse bid of $900 million, the investment bankers representing Nortel said the portfolio could bring as much as a billion dollars. After the Google bid, speculation was that the bidding could go as high as $1.5 billion,” said Laurie. And even those predictions turned out to be remarkably wrong. “Thus, even the most optimistic and well-informed parties,” Laurie finds, “did not even come close to estimating the 'market value' of this property."
The high-tech elite offered billions to own Nortel’s patent portfolio, because it promised vast new revenues. According to Laurie, “this is not about money, in the form of licensing revenue. This is about market share.” Gaining or losing a few percentage points of market share in the global smartphone market could translate into gargantuan upticks or downticks in the market caps of companies such as Apple and Google.
In the case of private patent sales, it may still be too soon to measure actual prices changes. John Koepke, a partner at Red Chalk, an IP professional services firm, believes it’s hard to tell at this moment how much patent prices will rise in private transactions. But, for patents within the same technological area as those in Nortel’s portfolio, he “would expect to see increases in the future.”
Even if the prices that will be paid in private sales cannot be predicted precisely, the Nortel auction has certainly altered sellers’ perceptions of the value of their patents. Uzi Aloush, CEO of iLeverage Group, an IP brokerage firm, says his clients’ expectations have gone up by an order of magnitude.
“If they wanted to sell at $1 million before, now they want to sell at $10 million,” said Aloush.
Laurie concurs that the Nortel auction has had a profound effect on sellers’ beliefs. “It has unreasonably inflated the expectations of patent holders, many of whom fail to appreciate the 'special circumstances' surrounding the Nortel auction."
Private sellers may not yet fully appreciate what distinguished the Nortel auction. Aloush identifies multiple factors that set the Nortel bidding apart. The Nortel portfolio contained high-quality patents, Google had relatively few patents in relationship to its gigantic sales, and the Nortel bidders were enormously powerful.
“It was a battle of giants,” he said.
Laurie agrees that buyers are concentrating on high-quality patents, and he points out another crucial factor that differentiated the Nortel bidding. “This was Apple deciding that even though they didn’t necessarily need these patents, they were willing to pay over $2 billion to prevent Google from getting them. That would have given Google counter-assertion capability.”
Because few transactions in which private companies and individuals participate will share all or even most of the key factors that led to the unprecedented bidding in the Nortel auction, buyers may not be willing to pay what smaller sellers seek. So long as public markets continue to place premiums on strategically important patent portfolios and memories of the Nortel auction remain vivid, it may be a while before small companies and individuals readjust their expectations. According to Aloush, “[i]t will take time for everybody to relax.”
[This is the second in a two-part series on an emerging Silicon Valley patent war]