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Rambus Meltdown – Does Value Exist?

|Includes:Micron Technology Inc. (MU), RMBS

Rambus’ shares fell 10.19% yesterday bringing its three consecutive trading day loss to 31.6%.

Shares began plummeting on Friday as news emerged that a US Appeals court had agreed the company wrongfully destroyed documents relevant to patent infringement cases involving Hynix and Micron.

While these rulings were certainly bad news for Rambus there are a few interesting things worth noting:

First, neither case was thrown out by the appeals court. Instead Friday’s decisions vacated earlier rulings and sent them back to lower courts for reconsideration. While this is a big setback for Rambus it in no way precludes Rambus from collecting on these patents.

Second, involves the appeals court decision to vacate the lower court ruling in Rambus’ case with Micron. The lower court had already ruled against Rambus on grounds it destroyed documents. Sending the case back to the lower court open the case for reconsideration that destruction was not serious enough for the case to have been originally thrown out. While Friday’s decision is unlikely to change the lower courts original decision it does however keep this case open and live.

This being said, I am in no way saying the market has been wrong in dealing a blow to Rambus’ share price. Rambus’ position has been severely weakened and its share price reflects it. My question is if Friday’s rulings have been over reflected in its price. Two things make me wonder.

First, Rambus is actively involved in other, higher reward lawsuits. Rambus is not litigation shy and has a reputation for high-risk predatory patent litigation which is unlikely to end anytime soon. Just next month a California court is set to hear a separate case against Micron involving price fixing. Many analysts believe this case has the potential to award Rambus damages much greater than the two cases involved in Friday’s appeals court decision. Some believe damages could exceed $4 billion. This is a stark comparison to the $400 million awarded to Rambus by the lower court in its case with Hynix.

And second, this week Rambus announced it was buying Cryptography Research Inc. in a deal that gives Rambus access to areas such as network security, content protection, anti-counterfeiting, and financial services. While royalties generated from Cryptography Research patents may not promise the same high returns Rambus has enjoyed from litigation , it does significantly expand its patent holdings and if Rambus lives up to its reputation we can expect to see a slew of future litigation involving these newly acquired patents in the not so distant future.

Stocks: MU, RMBS