Vringo (VRNG) quite expeditiously announced this week that it has expanded its litigation against ZTE to include France. While many are sure to reflect on this with only passing thoughts of its potential impact, others are thinking settlement tactics. Did Vringo strategically release this ZTE update for the benefit of a potential buyer or infringer? Is Vringo's latest public release an attempt to induce settlements or buyouts? The answer differs depending on who has the most to gain or lose.
The game has changed speed and the music is faster, with new announcements spaced between days unlike the grueling weeks and deafening silence of the last few months. Let's examine the facts. As I opined early here, Microsoft (MSFT) and Vringo have engaged quickly and unexpectedly, causing many investors to develop a new awareness of Vringo's game changing strategy. With that awareness has arrived trepidation. The stock has bounced from $2.71 to $3.50 in the last 5 days as investors try to make logical conclusions of the events of recent. How will this play out and who will have the greatest desire to settle, or conversely buy Vringo, are the questions I will try to answer.
Time is money. The now well-publicized letter that was transmitted to Judge Koeltl last week has put Microsoft in first position on a suspected settlement or purchase. Many have estimated that Microsoft is just kicking the tires, that Vringo is being accommodating in allowing them 60 days to conduct due diligence on a potential settlement, before the litigation resumes course.
That might be the case if Vringo was negotiating among equals. Clearly they are not and further this upstart has shown in the post verdict filed motions (I/P Engine vs. Google) warp speed in filed litigation. Vringo counsels Dickstein Shapiro are litigators who want to litigate, and at upwards of $1,000 an hour granting timeouts amounts to giving away the advantage.
Few analysts have done the real research to conclude the exact dollar amount of damages, with only Maxim Group giving a number of $71 million. This estimate is fraught with inconsistencies. Why would Microsoft consider purchasing Vringo, if all that could be derived from their litigation is $71 million? In fact, SA writer Chris Hofmann (here) has more than schooled Maxim's best analysis in determining Microsoft's infringement worth to Vringo. The most logical Microsoft damage estimates are somewhere between $123 million and $1.38 billion, factoring causal events like treble damages and extended litigation. In my opinion, $71 million doesn't buy 60 days at this negotiating table.
However, before I get swamped with replies, on the high side value estimate, let's not forget what Vringo is. Vringo, Inc. is engaged in the innovation, development and monetization of mobile technologies and intellectual property. Do not expect this enterprise to acquiesce to Microsoft for a quick cheap settlement. On the contrary, expect litigation. Vringo is negotiating from strength, not weakness. This leads me to believe the 60 days requested were actually Vringo's option, not Microsoft's, in mulling the dollar value of a potential settlement offer or buyout. In my opinion, Microsoft leads the pack on who writes the first check. With such a significant damage range, a Vringo buyout could justify a $700 million to $1 billion stock purchase, amounting to little more than lost interest on the multi year $6.3 billion aQuantive debacle.
Vringo has turned up the heat, announcing new litigation concerning Vringo's acquired Nokia patents, with litigation filed against ZTE (OTCPK:ZTCOF) in the UK, Germany and now France. These patents are key to ZTE's GSM/UMTS multi-mode wireless handsets. Vringo's recent action of adding France to the mix comes at a bad time. ZTE was recently hammered by a German court ruling that concluded ZTE had infringed on Huawei 4G "key derivation." While holding an impressive cache of patents, ZTE is vulnerable and Vringo knows it.
How much will Vringo collect should the European courts agree? ZTE is looking at a 1% royalty rate (FRAND) on the $3 billion in sales at issue. This equates to a $30 million a year expense, multiplied by 7 years of patent life or $210 million. This leaves out additional damages for past infringement, growth or Attorneys fees, the total not being a number Vringo would easily discard. How strong is ZTE? Based on the last report filed for 2012, ZTE had about $13.8 billion in operating income (adjusted for RMB's-Chinese Yuan).
In 2011, ZTE showed its muscle by making a rumored $647 million Ericsson damage award disappear. A power house, ZTE said in 2011 that it wanted to be in the top three worldwide providers of 4G LTE devices by 2015. Just last week ZTE's Guo Xiaoming, Chief Legal Officer, claimed that ZTE will begin exploring avenues, such as patent pools and licensing, to generate increased value from the massive portfolio of U.S. and International patents the company already owns and has in pending approval status. Could the timing of that announcement be any more relevant? It appears ZTE is hard at work at putting words into action. As of 2012, ZTE has filed 3906 patents, more than anyone in the world. ZTE could effortlessly spin the tables and pursue a buyout of Vringo. The Google and Microsoft litigation becomes a bonus or possibly leverage on future projects. ZTE has very big aspirations and the cash to make it happen.
Google (GOOG) has to be the most confused titan in this game among titans. Microsoft's standstill agreement with Vringo has negative Google implications written all over it. It now appears a foregone conclusion by the events of late, that Microsoft may be thinking the old saying: "The enemy of my enemy is my friend".
Google is exposed to the worst by damages among the infringing companies. After receiving the negative verdict and the aftermath that followed, it now appears the final number could exceed $550 million to $1.10 billion. This number would assume growth variables and is the sum total damages calculated through 2016 (utilizing a 3.5% - 7% recommended royalty rate). It also does not include some of the post trial motions set now before Judge Jackson, which could allow for a jury correction, past interest, and other damages. The post verdict motions roll on as it was just announced that Vringo won a key post-verdict motion. Specifically, supplemental authority allowing Vringo the right to include the recent VirnetX vs. Apple royalty base decision in support of I/P Engines' Dr. Becker's heralded damage testimony. This moves Vringo one step closer to Jackson ruling on the Google 831 JMOL, a key obstacle to ruling on other income generating Vringo post trial motions. The case is building for Google to follow ZTE's Ericsson's lead, and I wouldn't be surprised if this latest turn of events finally brings Google to the negotiating table.
Conclusion: Vringo has options
There is no doubt that one of these titans could propose a buyout. The question then becomes does Vringo want to stay independent or cash out. The recent disclosures suggest that Vringo is here to stay. New Vringo patents have been approved by the USPTO, and some of those have great application. The alliances that Vringo is forging with Virginia Tech could be instrumental in long-term patent development. Further the successes played out with Google, Microsoft, and ZTE will secure Vringo's future as a magnet for those seeking protection and enforcement of their patents.
In the same way that Hudson Bay and Iroquois Capital finance new ventures, Vringo's (after settlements) stock rise could become the preferred equity in securing new partnerships. One small company, Worlds, Inc. (OTCQB:WDDD) claims to be also under the boot of a billion dollar infringer, Activision Blizzard (ATVI). It's these kinds of opportunities that could expand Vringo's business, and continue to make it relevant for the future.