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By Tony Dutra
Nov. 18 — There’s more to finding the value in large patent portfolios than just trying to monetize them.
Intellectual property financiers at the IP Dealmakers Forum in New York suggested Nov. 18 that companies seek creative opportunities for IP investments and transactions that go beyond traditional options for monetization. But getting IP and finance experts together on innovative deals can be challenging.
“The hardest thing [hindering those deals] is convincing IP people with arguments that are pretty obvious to finance people, and convincing finance people with arguments that are pretty obvious to IP people,” Michael Friedman, CEO of Hilco IP Merchant Banking, said.
Opportunities are being missed by looking only at historical “boxes” of IP valuation, he said. “A lot of people are trying to do the deal that everybody else just did.”
Many IP investment players, such as non-practicing entities, try to monetize large portfolios in order to finance litigation or acquire patents for licensing and assertion. But Ami Shah, managing director of the Fortress Investment Group, said monetization shouldn’t be their first thought.
Almost every company with a large patent portfolio can be divided into verticals that have different needs, Shah said. It may be necessary to keep, sell or license each vertical’s “bucket” of assets separately within the portfolio. And the licensing could be in-house or spun off to a separate entity, depending on the situation.
“One deal could contain four or five means of handling different buckets,” Shah said.
There is also value in working deals that take advantage of IP-rich companies that need financing, or companies that need to take a strategic position regarding IP, Friedman said. Hilco, Fortress and others who finance IP deals have multiple opportunities to take advantage of unique situations, he said.
For example, any entity looking to license a patent portfolio will implement a large-scale monetization program that is going to have negative cash flow in the first two or three years until licensing revenues or damage awards start to come in, he said. Financing the program in those early years can take the losses off the balance sheet.
Companies that are acquisition targets present another opportunity. A snag in a deal could arise if an acquirer is committed to cross-licensing its patents, devaluing the target’s portfolio if it is included in the sale. That presents an opportunity to finance a transaction putting the assets in another entity before the acquisition, Jose Esteves, a partner at Skadden, Arps, Slate, Meagher & Flom LLP, said. Fortress has also done IP-backed bridge-loans during the acquisition process, Shah said.
Friedman also sees opportunity for arbitrage deals in the gap between what Wall Street knows about the value of IP and what IP professionals know. Wall Street, he said, assumes the same level of risk in any patent portfolio.
Other conference speakers complained about the typical “dollars per patent” valuation comparisons made in the Rockstar and Google portfolio acquisitions in the early 2010s. Rockstar was a patent-holding consortium that bought 6,000 patents from Nortel for $4.5 billion in 2011. Consortium members included Apple, Blackberry and Microsoft.
The IP valuation community knows the difference between A and A-minus quality patents, “which sell, and the rest, which don’t,” Friedman said. In a world of distressed IP, a temporary owner of a high-quality portfolio can flip it in a year without a loss—and even the prospect of a significant gain, he said.
The IP community also knows better when a particular company needs to take a strategic position for competitive reasons. That increases the value of other companies’ patents to that particular company, Friedman said.
Google was just such an example, he said. Rockstar bought patent protection on signal processing by acquiring Nortel’s portfolio, and Google could only get similar protection from patents owned by Motorola Mobility or InterDigital. Investors could have bet on the stock of both companies and come out ahead based on the premium Google paid for the Motorola portfolio, Friedman said.
Chinese companies, Shah said, that are trying to enter the U.S. market are in a position to make similar, strategic buying decisions.
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