Following Google’s (GOOG) announced its intent to acquire Motorola Mobility (MMI), shares of InterDigital (IDCC) came under pressure as the market perceived that Google is out of the running to acquire InterDigital and its leading 3G and 4G patent portfolio following the Board’s decision to explore strategic alternatives. It is because of that patent portfolio combined with the increasing nature of patent lawsuits that I recommended IDCC shares as part of my Asymmetric Business Model investing theme several months ago. As expected, the recent sale of Nortel’s patent pool has been a catalyst for IDCC shares and I too thought Google was a logical acquirer of InterDigital following its loss to Apple (AAPL), Microsoft (MSFT), Research in Motion (RIMM) and others that struck the winning bid for Nortel’s patent pool.
Despite Google’s intention to acquire Motorola Mobility and its patent pool, there are ample suitors for InterDigital’s patent pool, which is not only solid in 3G but even stronger in 4G per data from Informa and others. As patent battles in the Connected Device space continue, InterDigital’s patent portfolio would be an attractive asset to any of those companies that lost out on the recent Nortel patent auction or ones that need to shore up their respective patent portfolio - Google and Apple included, particularly given InterDigital’s patent position in 4G.
As regular readers will recall, my position on MMI has been a negative one given the ensuing smartphone and tablet bloodbath that continues to intensify as well as the lofty valuation accorded to MMI shares
. That fundamental perspective has been rendered mute given Google's $40 per share bid for MMI. With MMI shares trading at 5 percent below Google's $40 per share bid, I would recommend holders of MMI exit their positions with risk averse holders taking profits; for more risk tolerant investors, I would recommend exiting MMI positions and using the proceeds to buy IDCC shares.
Many will look at the $4.5 billion paid for Nortel’s patent pool as a reference point and argue a per patent dollar amount, which equates to $750,000 per patent. Such math would suggest InterDigital’s 8,800 granted patents are worth more than $6.5 billion or $150 per InterDigital share. What needs to be pointed out is the underinvesting in Nortel’s patent portfolio in recent years compared with InterDigital’s ongoing efforts as well as InterDigital’s superior 4G position. Others will view Google’s $12.5 billion bid for Motorola and argue Google is paying roughly $700,000 per patent, which I disagree with given Motorola’s net cash position as well as its device and set top box businesses. If we were to use such logic then we would have to consider the $1.2 billion that Hewlett-Packard (HPQ
) paid for Palm and its 1,650 or so patents - that derives a price per patent near $600,000. And as we found out after the fact there were other bidders for Palm, including Apple.
Even if we were to adjust accorded valuation multiples on a dollar per patent basis or on peer metrics for other IP licensing businesses to account for near-term hurdles at InterDigital - pending Nokia litigation and the need to re-up customers, such as LG - IDCC shares remain undervalued relative to the company’s IP and patent position. As part of a larger organization, odds are several of those valuation-affecting issues would be addressed.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.