The settlement landscape has changed, and the dance is about to get serious.
Apparently, Don Stout reads Seeking Alpha. While you and I were sleeping last night, Vringo closed a deal to raise an additional $45 million through a direct offering of 10.3 million shares to institutional investors. You can read their press release here.
This news illustrates what we discussed yesterday about settlement leverage. By making this financing deal, Vringo increased its settlement leverage and decreased Google's settlement leverage.
Yesterday, Vringo was land rich (okay, patent rich) and cash poor. They were looking at walking into Tuesday's settlement conference with only about $10 million in the bank. While $10 million is a lot of money to you and me, it doesn't go so far when you are in the business of filing patent lawsuits for a living.
Google, on the other hand, is not cash poor. In fact, Google has lots of money, so much so that they can't even fit all the zeroes on their balance sheet (I checked, this is literally true).
So what does this have to do with leverage? With only $10 million in the bank, Vringo's biggest weakness in the settlement conference was that it made Vringo vulnerable to a lowball settlement offer, accompanied by those painful words that folks who are low on cash often hear in a negotiation:
Take it or leave it.
Think seriously for a moment about how Vringo's execs might respond to a $200 million take it or leave it settlement offer from Google, knowing that if they let that money walk away, they might wind up with (1) a big fat zero in the event of a losing trial verdict; and (2) only $10 million in the bank (actually less, by the time trial is done), which is pretty much no cash reserves for a company like Vringo.
Faced with this situation, there is a good argument to be made that Vringo might have felt compelled to accept a lowball offer from Google, reasoning that while low, $200 million (that's a made up number, but you get the point) would put them in a secure financial situation going forward, and they could make up the difference against ZTE, or Microsoft, or Yahoo.
Folks who are low on cash sometimes have to sell low. It's a fact.
That's why last night's financing deal is huge, heading into Tuesday's settlement conference. By walking into Tuesday's settlement conference with $55 million in their pockets, Vringo obtained the kind of economic bargaining power that communicates that:
- Vringo does not need to settle, since its cash reserves have been replenished; and
- Google must offer a settlement sum that is reasonably related to the actual infringement damages claimed in the case, since Vringo can now shrug off a lowball offer.
Again, settlement negotiations are all about leverage. Last night's financing deal removed quite a bit of leverage from Google, and frees the settlement process to focus on a real, negotiated settlement number, instead of a take it or leave it number. That's great news for Vringo bettors. I am well aware that Vringo stock opened lower this morning. Remember, don't focus on the ticker. That's white noise. We care where the price ends up, not how it bounces while its way to getting there.
One last thing. I know a lot of us are going to feel a little antsy over the weekend as this case nears its climax, so I'd like to leave you with a thought that has given me some serenity in the madness.
When I first decided to bet my hard earned money on Vringo, I have to admit it felt a little frivolous. But I have to admit that knowing Mark Cuban had already bet about $3.5 million on Vringo before me just made me feel more confident.
Last night, five institutional investors bet $45 million on our crazy little company, and they bought in at a price ($4.35) that is a lot higher than almost all of us paid. Knowing that I got in earlier, and cheaper, than the guys who just bet $45 million on Vringo sure makes me feel like things are going in the right direction.
See you guys next week, and good luck to us all.
Disclosure: I am long VRNG.