Making A Case For InterDigital

| About: InterDigital, Inc. (IDCC)
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I have been very intrigued by the recent pickup in the Intellectual Property (IP) patent companies of 3G and 4G technology, and subsequent stories that have come out over the last few months. From acquisitions, lawsuits, licensing deals (or settlements), a bankrupt company's (Nortel) patents selling for 4.5 billion in an auction-style bidding, and now the current auction for Interdigital, Inc. (NASDAQ:IDCC)-- a lot is going on in this sector.

Interdigital, Inc. is a very interesting company. Founded in 1972, the company has gradually built up its patent portfolio to around 10,000 worldwide, many of which include 3G and 4G technology for cellular phones. In late July, Interdigital hired Barclays and Evercore Partners, two investment banks, to "explore and evaluate potential strategic alternatives, which may or may not include a sale." In not so many words, the company is up for sale to the highest bidder in a closed auction.

Ever since July, when Interdigital announced it is seeking "strategic alternatives", daily debates on message boards regarding what price it will sell for has been very intense. There aren't too many times when a stable and viable company such as InterDigital goes on record and essentially states that it is for sale to the highest bidder in a closed-bidding process. It presents a unique situation.

I want to break down InterDigital's patent value as it stands now, and what it will mean to the company that buys them.

I want to first take a look at Nortel, the company that went bankrupt, but who also owned thousands of patents that are of use to tech giants like Apple (NASDAQ:AAPL), Google (NASDAQ:GOOG), Qualcomm (NASDAQ:QCOM), HTC, Research in Motion (RIMM), Intel (NASDAQ:INTC), and so on. Initially, when the bidding started for its patents, Google placed a "stalking horse" bid of $900 million. In my view, this number is important for several reasons. First, Nortel patents were far less useful and more outdated than InterDigital's. There will be people who will argue this point to no end, but the fact is that InterDigital's patents are more valulable than Nortel's. To make my point, few of Nortel's patents were of 4G standards such as long-term evolution (LTE). Yet, those were the ones that the bidders clearly wanted and paid heavily for. The bidding ended with a consortium of bidders that, at the end, went for $4.5 billion.

Another important aspect with the initial bid by Google is that in a bidding process, the bidders obviously start low. Last week, a company named DealReporter, if taken to be accurate, mentioned that the first initial bids for Interdigital were placed at between 1-2 billion. If Interdigital-- who owns around 9,000 patents worldwide, many of them 4G-- received a higher bid than Nortel's to begin with, what might that say to the final price? Interdigital's stock got slammed on this news, and at one point was down 20%. It created an excellent buying opportunity, I believe, for those who wanted to add to their position or initiate one.

InterDigital also happens to have $700+ million in cash. If InterDigital is going to be bought out as a whole company, it would also be important to note that it has a stable of engineers coming up with new ideas all of the time.

InterDigital hired Barclays Capital and Evercore Partners in July to find out the interest in its patents and to conduct the bidding process. Barclays, who is heavily respected, is known for getting deals done. Barclays is not going to tell InterDigital to put itself up for sale if it didn't believe the company wouldn't be able to fetch what its value is.

With this auction process being closed (they are legally bound into a confidentiality agreement), only rumors and guesses as to whom may purchase InterDigital will do for now.

Google was once rumored, but then it purchased Motorola Mobility (NYSE:MMI) for 12 billion. People seem to think that this takes Google out of the list of potential buyers, but I disagree. If anything, acquiring InterDigital will only make its stance in the smart-phone and tech world even that much more stronger.

Intel has been thrown out there as a possible buyer, as well. That would surprise me a little bit, but Intel does have the cash to.

Seriously, throwing any name out there as a potential buyer is just speculation. If I had to guess who will win, in my view it will be Apple or Qualcomm.

Since this auction has been going on, I would like to make one quick point to those who say it will be sold as a "take-under" or slightly above $65/share. If this were the case, don't you think the CEO and Board would be well aware that the price they were hoping for was not going to happen at this time? They could have very easily have walked away from the bidding and announced that the company is no longer for sale, and that they will look at it again in the future when the time is right. The fact that this hasn't happened speaks volumes to me. No news is sometimes good news.

I think the sale will be for slightly over $5 billion, eclipsing Nortel's auction. This would bring the share price to about $105-110/share. Would I be surprised if it went for more than that? Absolutely not. Remember, this is an auction with very valuable patents. Auction is the key word here. In the meantime, sit tight. It's going to be a rocky ride with ups and downs until something is announced.

Anytime you are dealing with the possible sale of a company, it is always a smart move to hedge your positions in case there possibly won't be a sale. While I personally do not think that will happen, play it safe. For long stock holders and call option holders, buy some inexpensive put options that are two months out until expiration and that are deep out-of-the-money to protect yourself.

Disclosure: I am long IDCC.

Additional disclosure: I own November 2011 call options