Microsoft And Judge Jackson Gives Vringo More Firepower?

| About: FORM Holdings (FH)

Microsoft (NASDAQ:MSFT), Google (NASDAQ:GOOG), and many other tech giants have been strong proponents of patent reform, advocating changes that benefit defendants in patent infringement. However, the old proverb "the enemy of my enemy is my friend" may actually hold true. On May 30th, Microsoft took an entirely different view of its patent reform ideas, and conveniently decided to support an alleged patent troll Vringo (VRNG). The announced Vringo vs. Microsoft settlement provides for a 5% cash component payment based on the anticipated Google settlement, but more importantly assigns 6 Microsoft patents to Vringo. Vringo states those assigned patents relate to telecommunications, data management, and other technology areas. It's no mystery that Microsoft is locked in mortal combat with Google on multiple fronts. Microsoft enriching Vringo now, on the heels of a federal court royalty motion, adds impetus both in future stock value and litigation prospects. It would appear that Vringo now possesses several catalysts that could drive share value quickly. Let's evaluate a few possible scenarios attributable to Microsoft's acrimony of Google, and the upcoming royalty motion decision.

Barter for a higher Google settlement

It is possible that Don Stout, the quintessential patent attorney of the decade, reviewed Microsoft's patent portfolio and found something that Google wants. Being a former USPTO Attorney, Don's judgment in finding the pick of the patent litter is a given. Naturally Microsoft would never support its arch foe in any positive manner (other than lip service for patent reform), opting to let patents expire worthless than be responsible for assisting new Google growth enterprises. Vringo could have taken advantage of this animosity and smartly grocery shopped a few choice plums for Google. I wouldn't be surprised if opposing attorneys Quinn Emanuel gave the list to Shapiro Dickstein the day after Vringo served Microsoft with the Vringo patent infringement complaint. Good legal counsel studies all possibilities and this would be extremely beneficial in making and possibly enhancing a strategic settlement with Google at some future date, post royalty motion or pre-appellate verdict.

Enhance the equipment patent portfolio

Microsoft is reluctant to litigate its partners, in the same manner as Nokia. If Microsoft were to sue other equipment makers for patent infringement, they could countersue Microsoft for infringing on their own patents. Since it doesn't have any applicable products, a company like Vringo can't be countersued for patent infringement.

These select patents could possibly be foundational in nature and while valuable prudence demands no enforcement, lest Microsoft damage its reputation among its vendors and distributors. Unlike the Nokia purchase, Vringo would have negotiated complete ownership of the Microsoft patents, giving Vringo the right to pursue anyone that infringes the patented technology. Settlements over equipment patents seem to be more favorable, especially in light of some recent court rulings over software patents. Looking at Wi-LAN (WILN) and VirnetX (NYSEMKT:VHC) as examples, it's clear to see the value in telecommunication patents.

Force new litigation and settlements

The announced settlement covers Microsoft's Bing search advertising apparatus. Bing is licensed out to other Content providers such as Facebook. However the Microsoft settlement would not have provided relief to Facebook (NASDAQ:FB). On the contrary, Facebook would have to gain its own settlement with Vringo. The value of a Facebook settlement is yet to be determined, as it has not been named as a defendant. Watching the royalty motion closely is Yahoo (YHOO). History shows that Google licensed Yahoo's Overture search patent prior to Google going public. It's this patent that Yahoo, just like Google, employs within their search ad business. It stands to reason that in the next few weeks we should see litigation being served on Yahoo. The dollar value of any potential settlement value with Yahoo would be much less than Microsoft, which on the low estimation was projected at around $200 million.

Royalty motion 3.5%, 5% or 7%

Investors know the value of these percentages. Federal Judge Raymond Jackson will decide whether to follow the jury's advice and award 3.5% or follow Vringo's suggestion and decide that willful infringement deserves a bump to 5%. He may go that extra mile and further decide the "workaround games" played by Google merit an extra punishment and kick the award up to 7%. The payoffs over the life of the patents are also clear, just as Google will be expected to Appeal this decision immediately. That will bring an immediate "risk" discount to the award. For both long and the short investors let's factor in equal odds of winning or losing the appeal, and assume one week after the award the short positions have been cleared out and the stock has drifted down to real "risk" value. This chart reflects the sole value of the Google award added to a share price of $3.11 and does not factor in other damages that may be added at a later date.

Royalty Value With 50% Appeal Loss Risk (Award/2)

  • 3.5% $550 million Add to share price $ .60
  • 5.0% $825 million Add to share price $1.87
  • 7.0% $1.1 billion Add to share price $3.54

Conclusion: Vringo is positioned for an immediate increase in share value

Microsoft made a strategic decision in paying, in the form of patents, for a license agreement. Indirectly they could be responsible for many more patent infringement lawsuits against their partners and their competitors. Their actions may have indirectly aided and abetted their nemesis Google, and possibly the next Motorola product expansion. It's yet to be seen who will profit the most from this opportunity, but expect Vringo to enrich themselves thru multiple strategies of bartering and patent monetization. Added to these dynamics is the royalty decision, due at any moment, providing Vringo the opportunity to enhance their market capitalization for both near-term gains as well as long-term prospects. Those are the essential drivers Wall Street demands and rewards to successful patent enforcement enterprises.

Disclosure: I am long VRNG, VHC, WILN. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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