Last Monday, the Wall Street Journal reported that the opening bids for the Kodak patent auction of 1,100 patents got off to a slow start as the opening bids were between $150 million to $250 million for the patent portfolio of 1,100 patents. That equates to about $136k/patent to $227k/patent for a midpoint of about $182k/patent. Although it is still early in the auction process, this is a disappointment for investors in companies with significant patent exposure such as Research In Motion (RIMM), Nokia (NOK), and others. The opening bids suggest that the value of patents isn't as high as previously thought.
The reason for this article's focus on RIMM and NOK is because there has been a lot of talk in the value of the patents each company owns. And in a liquidation or breakup scenario, there is significant value that each company's patent portfolio would bring to equity holders. However, if the market for patents isn't as hot, which the slow start to the Kodak patent auction suggests, this may scare potential investors away from the two stocks.
The announcement of the winner and price was expected to come on Monday, however, the company announced that it is extending the auction deadline. The auction results are therefore on hold, whenever they do come out, they should serve as a catalyst for a number of stocks including the three well-known patent plays as well as RIMM and NOK. The three most known patent plays are InterDigital (IDCC), Tessera Technologies (TSRA), and Rambus (RMBS).
In NOK's and RIMM's case, a liquidation or breakup situation may leave their shareholders empty handed as previous break up estimates used were in the around $500k-600k a patent range, which is about in the middle of the range for private market transactions (more below). Notably, this is also the figure Kodak bondholders are hoping to a achieve in the auction. The WSJ reported that bondholders are betting the company will raise between $600 million to $700 million in the auction, or between 545k/patent to $636k/patent. Note, there is still time left for a higher bid as the winner is expected to be announced on Monday, August 13.
The openings bids are definitely on the low end of private market comps as the transactions on that market have ranged between $114k/patent and $1.19 million/patent. The most recent transaction was the InterDigital transaction where Intel (INTC) bought 1700 patents for $375 million, which is about $220k a patent. In a 2011 transaction, Nortel Networks sold 6,000 patents for $4.5 billion which is $750k a patent. In a different 2011 transaction, Google (GOOG) paid an enterprise value of $9.3 billion for 24,000 Motorola Mobility patents which is about $390k a patent. In a 2010 transaction, Microsoft (MSFT) bought 882 Novell patents for $450 million, which is about $511k a patent.
Other transactions have included Tessera's purchase of 73 patents for $35 million from MoSys for a price of $479k/patent. The Microsoft /Facebook (FB) transaction led to a price per patent of $846k/patent. The Microsoft/AOL (AOL) deal was done at $1.19 million/patent. A microcap, Tegal (TGAL), did a 35 patent transaction for about $114k/patent.
On the other hand, comparing the initial bids to the publicly traded comps, the bids are pretty healthy. There are three main patent plays trading on the stock exchange, InterDigital, Tessera , and Rambus . Rambus has an EV of $509 million with 1,386 patents and 1,059 patent applications pending. RMBS is trading on an EV/patent basis of $208k. Tessera has 1,736 patents with an EV of $290 million for an EV/patent price of $167k a patent.
InterDigital is a bit messier because of its recent Intel transaction. At the end of 2011, InterDigital had 19,500 patents. After the Intel transaction, IDCC has about 17,800 patents. IDCC had $328 net cash at the end of Q2 plus the $250 million (after tax) for the Intel transaction giving it a net cash position of $578 million. With 44.1 million shares outstanding times a share price of $32.07 leads to a market cap of $1.41 billion and an EV of $836 million. The market is currently valuing InterDigital at about $47k/patent.
The median for the publicly traded comps is $167k/patent while the mean is $141k/patent so the $182k midpoint is a pretty strong opening bid.
Disclosure: I am long IDCC.