InterDigital's patent sale to Intel is lifting shares from 2011 lows, but maybe not enough.
NEW YORK (TheStreet) -- After struggling to sell a patent portfolio earlier in the year, InterDigital (:IDCC) shares are surging after it announced a $375 million sale of 1,700 patents and patent applications to chip giant Intel (:INTC).
While investors are likely to see the partial sale of InterDigital's patent portfolio as a positive, the company's still battered shares signal that a current slate of intellectual property deals face challenges after tech giants spent much of 2011 cutting billions in intellectual property deals.
As patent sales fall in size, the financial turnarounds of many large tech companies like InterDigital, Nokia (:NOK), Research In Motion (:RIMM) and bankrupt camera pioneer Kodak, in part, hinge on a continued market for patents, amid a Silicon Valley intellectual property grab. However, InterDigital's Monday deal shows that the value of some IP portfolios may not be as high as initially expected.
On Monday, InterDigital said it would sell 1,700 patents mainly related to its to 3G and LTE mobile device technologies to Intel for $375 million in cash. In a separate announcement, the designer of hardware and technology for mobile devices like cellphones and smartphones also said it would double a stock buyback program to $200 million, after launching the capital return in early May.
The moves come as a slight surprise after InterDigital said in early January that it had concluded a strategic review to sell its intellectual property without selling the portfolio, which includes 19,500 patents as of December 31. At that time, InterDigital said it would focus on litigating and adding to revenue tied to the licensing of its patents, adding that it earned nearly $3 billion in royalties from 2G and 3G wireless technology licenses in 2011.
Monday's deal, in the context of InterDigital's patent sale process, signals that simultaneous IP portfolio sale and monetization efforts may be harder to execute than some may expect. Because InterDigital has sold licenses and is even conducting litigation related to its IP, those existing agreements may lower the value of patents to a prospective acquirer like Intel, says Richard Erlickman, President of patent brokerage IPOfferings. Previously, Erlickman was a Vice President of Intellectual Property and Licensing at IBM.
In 2011, Nortel Networks $4.5 billion sale of patents to a consortium of tech blue chips valued each of its patents at roughly $750,000 and AOL's (:AOL) recent $1 billion patent sale to Microsoft (:MSFT) valued IP at an even higher number, notes Erlickman. In contrast, he calculates that InterDigital's sale valued each of its patents at just $220,000 million, signaling the dilutive impact of existing license agreements.
As part of the deal, InterDitigal is selling just a fraction of its overall patent portfolio, which was expected to fetch up to $3 billion in a sale to Samsung or Intel, according to reports by the New York Times last fall. However, the company now may be parting with its crown jewel patents related to next generation smartphone technology for just $375 million. "These likely are the prime patents of the InterDigital portfolio," says Erlickman of Monday's sale.
While InterDigital shares jumped over 27% on the news of its deal in Monday trading, that lift was needed to pull shares from a near 50% year-to-date share drop on waning earnings and diminished IP sale prospects. It's a signal that investing in patent-rich companies requires has perils, even after Google's (:GOOG) $12.5 billion acquisition of Motorola Mobility (:MMI) and other richly priced deals.
"We announced at the start of the year that InterDigital would seek to broaden our strategies to monetize our patent portfolio through sales, licensing partnerships and other means, and the transaction with Intel is a significant milestone in those efforts," said InterDigital chief executive William J. Merritt in a Monday press release.
"In addition to patent sales, InterDigital is committed to our previously stated goal of generating $800 million in sustainable annual revenue in the next three to five years," added Merritt, who noted that the funds raised in the deal will help drive further licensing and investment in future innovation.
Intel's cash offer for InterDigital's patents will help the world's largest chip maker support its growth ambitions in mobile devices, while strengthening its IP portfolio against litigation, said RBC Capital Markets analyst Doug Freedman, in a note to clients. Erlickman adds, "It will allow Intel to continue to be a major player in the processing of chips that go into cell phones."
InterDigital's patent sale efforts have a bigger relevance for struggling tech giants, who expect to fund turnaround efforts through similar sales and licensing cash, but may find problems if licensing agreements and litigation diminishes the value of portfolios.
"I believe the value is reduced by encumbrances. I think that is also weighing heavily on the Kodak patent sale," says Erlickman. InterDigital's M&A efforts have coincided with a similar effort by Kodak. However, after failing to sell patents at the end of 2011, Kodak is now conducting those sales in courts after filing a Chapter 11 bankruptcy earlier in the year, amid a cash crunch.
Earlier in June, Kodak said it has signed confidentiality agreements with 20 parties on the sale of its 1,100 patent strong portfolio of intellectual property related to digital photos and imaging services. The company also said it has generated over $3 billion from licensing digital imaging patents from smartphone makers like Samsung, LG and Motorola Mobility. Separately, Kodak is also litigating patents with Apple (:AAPl), HTC and Research In Motion.
Kodak's efforts, taken with InterDigital's Monday deal have a broader relevance for IP rich but strategically slumping tech giants. "Investors can and should read from the success of Kodak's auction that companies with strong patent portfolios can monetize their IP assets to augment their revenues from their core business lines," says Alexander Poltorak, the chief executive of General Patent Corporation, who expects the looming auction to be a success.
"Even if some of these companies fall short of a resounding success in the market, technology trailblazers, such as Nokia, Research In Motion or AOL will ultimately be rewarded for their innovation through monetization of their patents, which result from their R&D activities."
-- Written by Antoine Gara in New York