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Vringo: Keeping An Eye On The Real Value Here

|Includes:FORM Holdings Corp. (FH), GOOG

There have been many articles speculating on the proper valuation for Vringo, Obviousness, The USPTO and so on. Everyone has a slant and is able to express it which makes this a pretty cool country to live in! I hope to inject just a bit of my own reality into the discussion and at the same time point to what I believe is the real value here, the Vringo litigation team.

A lot of people are talking about what Judge Jackson can do. One thing he can do is bifurcate his decision. He can make a final ruling on the jury verdict where he also sets a timetable to rule on a future royalty number. If, as I continue to claim, the Jury did something arbitrary in their calculations JJ can fix that with "NO" notice. Check out rule 60 under the rules of civil procedure. Vringo has made a clever move to have the court "value" the damages for the period from October 1-jury verdict. It will look awfully funny if the judge does what he considers to be the proper math based upon the expert testimony submitted at trial and it looks nothing like the jury's past damages number. I think the comments by the company regarding a decision from the court in a matter of weeks to months was made out of an abundance of caution and meant to end the incessant speculation and likely the constant phone and email queries to their office on the subject. I still find it curious that we have seen nothing from the Court or Google since the verdict.

As for company valuation, multiples and the like I have had this argument with some people who I consider to be pros (I am not and do not hold myself out as such) and some of those people argue for no award multiples as those awards have a finite end date...in other words investors can't count on anything presumably after 2016. They go on to argue that Vringo will just burn money on other patents thus constantly being exposed to the risks inherent in operating that way. What if they pay too much for a patent portfolio? Here is where I think one has to look beyond the numbers just a bit. If VRNG is going to pursue litigation against numerous companies on the current IP, many of these companies will choose to pay some level of past damages and sign a license agreement rather than fight the guys who just beat Google. Oh, and the laches ruling by Judge Jackson doesn't apply to new defendants. I sat in the court and heard Judge Jackson when he said one of his principal reasons for finding laches was the close realationship between Lycos and Google at the time Vringo claimed initial infringement. In other words he said that Lycos should have known then that Google was infringing. Again, that will not be true of future defendants. Therefore the argument that Google was the big prize for Vringo is not so robust unless the laches ruling is overturned on appeal. It may still be Vringo's largest award if the future damages amount to roughly $173M per year for four years but it would have been quite a bit more with those six years back.

The USPTO re-exam is a bit of a Red Herring in my opinion. Remember that there is no review of the 664 Patent by the USPTO and all of the claims in the 664 patent were found to have been infringed by Google et al. I don't see the USPTO process slowing things down here. All it takes, all it has ever taken, was for one claim in one patent to have been infringed for a finding of infringement. Many were curious as to why Google did not request a re-exam of the 664 patent as well as the 420. Now we know that that would have been a good idea. Keep in mind that the USPTO may invalidate a claim(s) in the 420 patent and not invalidate the patent. Then there is the question of Judge Jackson finding the patents obious. Judge Jackson was the one who wanted to hear from the jury on the question of validity before making his ruling. Keep in mind that a decision by him now to find the patents obvious would be an extraordinary one. He would have to find, based upon the weight of the evidence and after sitting in his courtroom and hearing arguments and seeing hundreds of pages of documentation and listening to experts, that the jury got it wrong. The attorneys I have spoken with put that in the realm of a long shot.

So what about the question of how to value this company going forward? No one knows quite how much money they stand to win from litigation and licensing in the future. We have seen one source conservatively value the Nokia Patent portfolio at $122M. Vringo could get that from ZTE alone folks. I think investors to a certain extent will buy Vringo on their own considered theory of what comes next. At some point technical science meets common sense. I witnessed what I and others would consider to be among the best litigation teams in the United States and that must be factored into investors decision making. It certainly factors in mine and it sure seemed to with many larger scale investors and I'm pretty sure that is why Vringo doesn't use other people's valuation standards. If you are among the best you do not get judged on the mean. So it isn't necessarily a question of what fair or rational multiple will be applied as this isn't your everday business. A saavy investor will examine the cases and make their own assessment of what the infringing element(s) might be worth and put a bottom line percentage on a potential past damages number and future royalties. Then one has to factor what a lump sum payment might look like. I look for somewhere close to a three multiple right now based upon what I think happens now and in the future. That is based upon my own methodolgy which considers multiple factors. It is my belief that this company will montize their patents as well as anyone else in this line of work. And no I don't have blinders on and I have factored that Vringo doesn't win every case.

I still think there will be a settlement with Google and I think it will be before Christmas. I thought, mistakenly, that we would have seen one by now. If there is no progress on that front in the next days and weeks I believe JJ will come out with a final ruling which will be the first shot across the bow. In that ruling I think he will telegraph where he is going with future royalties if those royalties are not announced as part of that ruling. At that point one party will be more disadvantaged then they are now and I'm guessing based upon quite a bit of research that that party will be Google. So it would seem that the best time to settle and avoid the future unknowns is now. And for those looking for reasons for Vringo to settle they include the long shot obviousness threat and the long, slow path of appeals. I'm sure they would like their money (at a discount) now. I don't know what the magic number is and I don't think anyone does. I'm not sure I buy that everything was set up around $300M because back when the lock up agreements were made we were talking well north of that number in past damages. I rank that argument in the realm of what is convenient now that we are able to look back. I will just say that I hope we are talking about at least that figure. One has to account for taxes and fees and $300M would become less than $200M pretty quickly.

With options expiration this past Friday and with many of what I would consider to be weaker longs out of the stock I look for this to go higher over the next days and weeks. I think smart money will continue to buy the company now and over the near-term as there are simply too many positive catalysts coming. In addition to hearing back from ZTE in January I think there will be at least two new suits announced by VRNG before then. It doesn't make sense to wait for the catalysts to buy this stock because most of these folks and many on this forum have rightfully surmised that the stock is currently trading at what should rightfully be close to a bottom.

Disclosure: I am long VRNG.

Stocks: FH, GOOG