Nortel Bankruptcy Patent Auction Is Biggest Technology Patent Sale Ever

||Nortel Bankruptcy Patent Auction Is Biggest Technology Patent Sale Ever

Nortel Bankruptcy Patent Auction Is Biggest Technology Patent Sale Ever

July 2011

 

A former tech highflier in the 1990s, Nortel at its peak had more than 95,000 employees and a market capitalization of nearly $300 billion. Nortel grew too quickly and overpaid for acquisitions. Nortel filed for bankruptcy protection in January 2009 and has since been selling its assets.

Nortel’s patent portfolio was recently auctioned. The final cash price is a surprisingly high $4.5 billion for around 6000 patents and patent applications. Nortel described the package as:

“… more than 6,000 patents and patent applications [covering] wireless, wireless 4G, data networking, optical, voice, Internet, service provider, semiconductors and other patents.”

In April 2011, Google made a $900 million stalking horse sale agreement for this technology collection, thus putting a minimum opening auction value. Immediately before the auction, price estimates for the portfolio were as much as $1.5 billion, a third of what the final price ended up being.

Before adjustment, the $4.5 billion price comes to an average price of $750,000 per patent and patent application. But some analysts indicate that only a third of these patents remain in force, which would increase the per-patent value to $2.25 million. If one further considers that no more than around half of the patents in these rapidly changing fields could still have substantial value, the average per patent value for the younger patents exceeds $4 million.

The winning bid came from a consortium of the following six companies who are at least partially competitors. So far, the six winning companies declined to discuss their plans for the technology, including who will own what. Although there is speculation about the deals made within the consortium, little is acknowledged fact. Here is our commentary regarding each company, and a summary of the speculation regarding their participation:

  1. Apple Inc. makes the iPhone, iPad and other popular “iStuff”. Apple reportedly led the consortium by paying $2 billion. Apple would want ownership of Nortel’s (i) 4G and LTE (abbreviation for Long Term Evolution) portfolio, which is expected to be the wireless technology standard of the future, and (ii) the patents that would allow it to bring suit against and thereby stymie Google’s Android technology.
  2. Research in Motion Ltd. (RIM), makes the BlackBerry. RIM said it contributed $770 million. RIM gets relief from future royalties, and would want additional wireless technology.
  3. Microsoft owns an operating system software used for mobile phones, operates the Bing search engine, and sells game platforms and related software. Together with Sony (see below), Microsoft reportedly paid $1 billion. Microsoft already had a license to the Nortel patents; however, the terms under which Google would purchase Nortel’s patents include Google not being bound by any existing licensing agreements on the patents. Consequently, Microsoft remained interested in the auction. In addition to retaining rights it thought it already had, Microsoft would like to see Google’s Android OEMs pay a licensing fee for using Android. This benefits Microsoft by (i) making money from Android’s licensing fees, and (ii) making Android more expensive than the Windows phone software.
  4. Sony Corp. makes a range of consumer-electronic devices and has a joint venture with Ericsson for mobile phones. With Microsoft, Sony reportedly paid a portion of the $1 Billion amount previously mentioned for Microsoft.
  5. EMC is the world’s biggest maker of data-storage computers. EMC reportedly paid $400 Million, but EMC only described its contribution to the consortium as “not material” to its overall finances. EMC would be interested in the subset of the patents involved in storage technology.
  6. LM Ericsson AB makes wireless equipment. Ericsson said it contributed $340 million to the consortium. In 2009, Ericsson purchased many of Nortel’s other assets, including its wireless network business, for $1.13 billion. Ericsson likely obtained a relief from future royalties, plus other technology that it could use in its handset business.

As noted before, Google was the other large bidder. Google owns the Android operating system, which is used in handsets manufactured by both Motorola and Samsung. In announcing its intention to bid on the Nortel patents, Kent Walker, Google’s Senior Vice President & General Counsel wrote as follows:

“… one of a company’s best defenses against this kind of litigation is (ironically) to have a formidable patent portfolio, as this helps maintain your freedom to develop new products and services. …So after a lot of thought, we’ve decided to bid for Nortel’s patent portfolio in the company’s bankruptcy auction. … If successful, we hope this portfolio will not only create a disincentive for others to sue Google, but also help us, our partners and the open source community—which is integrally involved in projects like Android and Chrome—continue to innovate…”

If one were to believe this passage, Google wanted the Nortel patents merely for defensive purposes. If this were the case, the Nortel patent portfolio at a $4.5 billion price makes no business sense for Google. One could certainly settle whatever lawsuits might have been avoided by owning the Nortel patents for a lot less than $4.5 billion, particularly when the saved purchase price grows because of returns from the cash that remains in Google’s coffers.

Here is our take on this remarkable auction result.

  1. The auction winners need to figure out how they will get back their investment plus an investment return. Because the price is so high and the scope of the Nortel patents so broad, this transaction is likely to trigger additional patent litigation.
  2. Since the price is difficult to justify based on a purely defensive basis, many of the patents have higher value in the hands of a single owner who can exploit their value through a combination of (i) new products, and (ii) royalties from threatened litigation. To effect this, the consortium must have some means of dividing the more important patents among the individual members, rather than allowing (as some commentators have suggested) a broad cross-licensing arrangement for the entire portfolio. Apple’s reported $2 billion contribution would suggest that it obtained outright ownership of the 4G and LTE technology.
  3. Some patents have wider application and have already been licensed to consortium members. Consortium members that are avoiding existing royalties have a much less risky proposition, and a resulting ability to pay relatively more for their portion of the price.
  4. Although the price is breathtaking, it is still a fraction of Nortel’s reported 15-year investment in those patents of nearly $40 billion. This demonstrates that patents cannot be valued correctly using the cost approach.

Fulcrum Inquiry appraises businesses and business intangible assets, and calculates damages in patent, trademark, copyright, and trade secret litigation.

2019-01-16T15:59:52+00:00Valuation and Appraisal|

Monthy Archives