Micron Technology Inc. (MU) agreed to acquire bankrupt semiconductor manufacturer Elpida Memory (ELPDF.PK) earlier this week, for a reported total purchase price of $2.5 B (USD). However, Micron explained in an SEC filing that approximately $1.75 B will be paid directly by Elpida, operating as a Micron subsidiary. Micron's cash expenditure at closing will be only $750 M. Micron likely leveraged its patent portfolio to hasten Elpida's collapse, while Apple Inc.'s (AAPL) fat cash reserves may have helped it secure a pass from future enforcement activity related to Elpida's portfolio
Back in 2008, when Micron and Elpida first reportedly began discussing a collaboration, Elpida carried a total market value of about $3 B. Instead of a deal with Elpida, however, by the fall of 2009, Micron transferred about 20% of its patent portfolio to a company called Round Rock Research. Former Kirkland & Ellis litigator John Desmarais, owner of Round Rock, quickly obtained license payments for the portfolio, including a suspected $280 M payment from Samsung.
However, a potentially complicated menage-a-trois with Intellectual Ventures likely delivered a heavily discounted Elpida to Micron's doorstep. Shortly after Micron consummated its deal with Round Rock, Intellectual Ventures set its sights on Elpida, instituting legal action against the Japanese DRAM maker in multiple district courts and the ITC. Micron was the primary beneficiary of IV's legal action against Elpida, leading to speculation about a potential alliance with Micron.
Elpida obviously had difficulties beyond patent lawsuits, but they could have caused just enough uncertainty to push the company over the edge, enabling Micron to pick it up at a 75% discount. Now, the success of Micron's original Round Rock deal has IP watchers speculating that the company tries to repeat the process with Elpida's patent portfolio. If and when that happens, Apple took action in recent weeks to minimize the threat posed by Elpida's patents.
A $1.2 B chunk of Elpida's debt belonged to Apple and came due this past April. However, Apple recorded a security interest in May of this year, granting the Cupertino, California outfit unspecified rights to almost 260 of Elpida's 2000+ patents. Reminiscent of its involvement with the creation of Rockstar Consortium, Apple apparently recognized a possible consequence of Elpida's bankruptcy: the patent portfolio going 'up for grabs' to the highest bidder.
Not wanting to end up on the outside looking in, Apple used its debt position and Elpida's desperation to secure a position with respect to the patent portfolio. The security interest functions as a lien, preventing an unconditional transfer of the patent assets unless the lien holder (Apple) agrees to its release. Of course, Apple would only do so after getting something it wants, such as a license to the portfolio, or part ownership in a new patent holding venture.
Investors of Micron and Apple should fully expect these companies, hardly strangers to IP monetization and the use of IP 'privateers,' to leverage their interests in the former Elpida patent portfolio, which ranks in the top 10 by patent count for semiconductor memory devices. Whether Micron leverages its existing relationships with Round Rock Research or Intellectual Ventures, or partners with Apple to jointly form an entirely new patent privateer outfit, a move to monetize the former Elpida patents would hardly come as a surprise.
Meanwhile, Apple should, at a minimum, leverage its security position to provide certainty in the face of an oncoming Elpida-patent onslaught, while its competitors legitimately ponder potential patent assertions or supply disruptions from other semiconductor suppliers.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.