Patents are becoming more and more important. In June, Apple and Microsoft (once cut-throat rivals) teamed up with four other companies to pay $4.5 billion for the 6,000 patents held by the bankrupt Nortel Networks. This works out to $750,000 a patent. Google is now in the process of buying Motorola
Motorola Mobility in no small part because of its stockpile of 17,000 patents. The patent portfolio, some analysts estimate, could represent more than half of the value of the deal, or more than $400,000 a patent. If so, it was a relative bargain compared to the Apple and Microsoft aquisition of Nortel patents.
In the case of Motorola, Google was under pressure from its big handset partners, including HTC and Samsung, to protect them from patent-infringement suits based on their use of Google’s Android software. And Motorola has an impressive collection of mobile phone patents, a powerful weapon in patent negotiations.
Handset makers and mobile carriers are certainly hoping that Google’s purchase of Motorola will ease tensions in the smartphone market — a patent armistice among rival powers. Verizon on Tuesday welcomed the deal as a move that might well “bring some stability to the ongoing smartphone patent disputes,” John Thorne, senior vice president and deputy general counsel, said in a statement. Verizon Wireless, owned by the Vodafone Group and Verizon Communications, sells both Android-powered phones and iPhones.
In a recent blog post, David Drummond, Google’s chief legal officer, wrote that a modern smartphone might be susceptible to as many as 250,000 potential patent claims (see picture below), depending on how broadly those patents and claims were interpreted.
Assuming Google would find value in the patent portfolio and not the operating businesses, an acquisition would presumably only make sense if Google had another partner (or partners), like HTC or Samsung, that wanted Motorola Mobility's operating businesses. If they could work out an arrangement with Google getting the patents and a partner (or partners) taking the other assets, then I'll argue that an acquisition could make a lot of sense based on a sum of the parts analysis.
Motorola Mobility has ~$3.2B in cash (~$170M are hiding as "cash deposits" on a separate line in the balance sheet, and are easily overlooked) with another $225M in additional payments from MSI still pending. They have $2.4B in deferred tax assets, though without reasonable expectations for operational profitability, they carry a $2.3B valuation allowance (again, easily overlooked). If the patents portfolio is worth anywhere near what Google [and Intel] bid on the Nortel patents, say $3.5B, then the sum of those parts is well over $11B in potential value. That's before assigning *any* value to the mobile and set-top operating businesses themselves.
But the operating businesses are almost certainly not worthless. They are set to generate ~$14B in revenue this year and the mobile business, with 41% Y/Y growth, is finally set to become profitable in Q4 of this year... if you believe the company's estimates. If a partner of Google's could reasonably expect to consume the operating businesses and then use their scale and/or superior supply chain to quickly bring them to even greater profitability, it's easy to imagine them being willing to pay at least some fraction of this year's revenue for the businesses, separate from the cash and tax assets. A multiple of .25X on this year's sales would be $3.5B. Seems low.
In total, that's in the neighborhood of $15B in value for a company that currently has a market cap under $7B. So, one might conclude that Google and its partner(s) could pay somewhere between those two numbers, providing a significant premium to market while still acquiring the assets below their fair value.
Of course, there are some restrictions on what MMI can do in its first 24 months as an independent entity, per the terms of the Tax Sharing Agreement documented in the 10-12B/A from the separation in January (when MOT became MSI and MMI). Per my understanding of those terms, if MMI takes actions that compromise the tax-free standing of the separation, as an outright acquisition might do, then they would be on the hook for any resulting tax liabilities. However, as the agreement states, "Though valid as between the parties, the Tax Sharing Agreement is not binding on the IRS" -- and, moreover, I believe there is quite a bit of leeway in terms of how an agreement could be structured in order to preserve the tax-free standing of the separation.
Whatever the case, a Twitter joke suggested that is people would want to retain jobs in Motorola, they better dress up as Patents and go to work.
Finally, patent pools is a good idea and can avoid lots of potential lawsuits and counter-suits. One such company very active in promoting a pool is Sisvel. A presentation from them in the LTE World Summit is embedded below.
