In the past few weeks, I have written Seeking Alpha articles on Tessera (TSRA), both before the ITC Ruling when the stock was at $16/share, and afterwards when the market didn’t appreciate the significance of the ITC win and the stock was still at $19/share.
Tessera now stands at $27/share and still has plenty of room to run. I also wrote an article on how the market has yet to fully appreciate the significance of the TiVo (TIVO) win in their case against DISH (EchoStar) in the Eastern District of Texas. While I think both of these plays have just begun the first stage of a long rise, investors are always looking for the next big play. I know one that is definitely worth further investigation. The name of that stock is Rambus (RMBS).
I have followed Rambus closely for over ten years. I have personally participated in the roller coaster ride that has sometimes been gut wrenching, and sometimes been thrilling. As you can see, the stock has performed like a roller coaster, going from highs of over $120 year in 2000 when Intel (INTC) announced Rambus DRAM (RDRAM) would be used in Intel computers, to lows of $3/share after the FTC filed Antitrust charges against Rambus in June 2002.
In the past four weeks, Rambus has quietly climbed from 11 to 14, and not many people have noticed. This is despite a document spoliation ruling from Delaware in January that went against Rambus (it is being appealed by Rambus to the Court of Appeals of the Federal Circuit). Before you automatically think Rambus did something illegal when they implemented a document retention policy in 1998, you should know that Judge Ronald Whyte of the Northern District of California has ruled that Rambus did nothing wrong when they implemented this policy. Judge Whyte is one of the most respected federal judges in the country, and his rulings are seldom overturned, while Judge Sue Robinson in Delaware has a much higher rate of having her verdicts overturned. It is my belief that Judge Robinson’s ruling will be overturned at the CAFC.
Why is Rambus stock climbing even though they had a major setback in Delaware back in January of this year? Here are some recent events that may be causing this rise.
- The FTC dropped the case against Rambus after the US Supreme Court denied hearing the appeal. Rambus is one of only a very few companies to beat the FTC in Federal Courts.
- Rambus won their DDR case against Hynix in the Northern District of Califiornia. Judge Whyte awarded Rambus 400 million in past damages and a 4.25% on-going royalty rate on US sales. Hynix is appealing this ruling, but they have to post a bond of 250 Million (plus provide 300 Million in assets as additional collateral), and they have to put the 4.25% compulsory royalty rate into an escrow account. Hynix has to post their bond later this month, and since bonding companies have changed their requirements in these tight credit markets, Hynix may have to seriously consider settlements.
- Rambus has a case at the ITC against a dozen companies including Nvidia and Hewlett Packard. This case is proceeding to trial in late August, but there are court mandated settlement talks in process. This case covers memory controllers associated with virtually all types of DDR and GDDR memory. Nvidia has tried to get this case stayed due to the Delaware spoliation ruling, but the ITC refused to stay the case. The staff attorneys at the ITC have agreed with almost all of the Rambus claims construction terminology. From my observations, this case appears to me to be going very well for Rambus.
- Rambus has an antitrust case against the Samsung, Hynix, and Micron in California State Court in San Francisco. ... case started in May of 2004, and it is finally coming to trial. Over the past five years, the defendants have tried numerous ways to get this case dismissed, or to delay the start of this case. But, Hon. Judge Richard Kramer just a week ago confirmed his tentative ruling that this case will start in September and that he would not allow the spoliation ruling from Delaware to stop the AT case. This news has not yet hit the mainstream business press, because the only reporter at the hearing had to leave before the judge issued his ruling from the bench.
Significance of the AT Case
Unless you have followed Rambus for 10 years like I have, you may not understand the significance of this Antitrust price fixing case they have against Samsung, Hynix and Micron. First, you should know that Samsung and Hynix signed plea agreements admitting that they fixed prices, and they both had several executives go to jail. Micron turned the other cartel members in to the US Department of Justice in exchange for amnesty. This story has been covered by major news media in the past. For example, Business Week first started putting together the pieces of the puzzle over 3 years ago in this excellent article.
Then, just a year ago, Bloomberg did an expose on the DRAM Price Fixing Cartel.
In essence, these defendants have already been proven guilty of DRAM price fixing, and now Rambus can tell the world (and a California jury) why they fixed prices. In fact, a few emails have already been made public in the early stages of this case.
The damages in this Antitrust price fixing case are huge. Rambus lost billions of dollars in royalties when the DRAM manufacturer’s actions convinced Intel to shy away from RDRAM as the standard memory for future Intel PC’s. In fact, in recently revealed court documents, Rambus alleges the damages to be 4.32 Billion dollars, which are then subject to automatic trebling because this is a Cartwright Act case.
Therefore, the total damages facing the DRAM manufacturers approach 13 Billion dollars. With Rambus having approximately 104 Million shares outstanding, that is over $120/share in past damages alone.
What About the Rambus Patent Reexminations at the US Patent Office?
Recently, we heard news that Rambus patents were invalidated in the Nvidia reexamination. This was simply the first salvo in these reexaminations, which, were all "ex parte" reexams. When the reexam process is started by a third party requesting a patent be reexamined, it is routine procedure for the patent office to initially reject all the claims as they start the process to review prior art, and other issues such as obviousness, anticipation, etc.
The US ITC will be finished with their trial and Hon. Judge Essex will have his initial decision out long before the US PTO gets around to issuing a final office action (which you will learn when you study the reexam process isn't really final). My research on ex parte reexams reveals that in only about 10% of the cases are all the claims rejected.
My suspicion is that most of those are cases when the patent owner didn't put up a fight.
In my humble opinion, this recent news flash about the PTO rejecting some patents was a non event, but it did help depress the stock price for those wanting to buy. There have been numerous “inter partes reexaminations” brought by Samsung against Rambus patents in the past 3 years. In every case, all the claims were rejected in the initial office action.
However, as Rambus worked with the US PTO to answer their questions, over 57% of the claims have been validated in the reexams where final office actions have been issued.
Why Is Rambus Undervalued?
After Judge Kramer ruled that the antitrust price fixing case is still on for September, and Judge Essex at the ITC has refused attempts to delay the case at the ITC, the DRAM manufacturers and the controller manufactures are facing huge financial consequences if they don’t settle. In fact, Rambus foes may even be betting their company if they are found guilty. So, there is an increased possibility of settlements.
In addition, now would be an ideal time for someone to acquire Rambus. While I doubt the Rambus Board of Directors would seriously entertain a buyout offer of less than $40, there could still be some major venture capital fund that would come along and offer $25 -30/share
My price target for Rambus over the next 2 months is $26, and my 1 year price target is $80 (this assumes the September trial goes forward as currently scheduled and this is a very conservative estimate)
Disclosure: Long RMBS, TSRA, and TIVO
