Did InterDigital Sell A Rembrandt At Thomas Kinkade Prices, Or Was It The Other Way Around?

| About: InterDigital, Inc. (IDCC)
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After abandoning attempts to sell its entire portfolio last year, InterDigital (NASDAQ:IDCC) announced this week the sale of 1,700 patents to Intel for $375 M. At $220,000 per patent, the transaction seems downright anemic, but the news gave IDCC's stock a nice 30% boost just for, as IAM Magazine pointed out, "doing what it said it was going to do six months ago." Recent, well-repeated benchmarks include the opportunistic Nortel creditor's $750,000 (minimum) per patent windfall, and the AOL-Microsoft transaction, which netted about $1 M per patent. Of course, Acacia's purchase of Adaptix for nearly $5 M per patent stands well above the crowd.

By comparison, IDCC's sale appears paltry, prompting Seeking Alpha contributor Kraken to proclaim that "in reality the company has just sold off its best patents to Intel." Of course, judgment calls on the quality of IP made prior to any IP being publicly identified are inevitably premature, but IDCC may have left an interesting clue by leaving one significant question unanswered. A joint press release on the patent purchase explained that "[t]he agreement involves patents primarily related to 3G, LTE and 802.11 technologies." The rest of the release describes what technologies IDCC develops and the typical inconsequential drivel that fills most corporate PRs. Noticeably absent from the description of the patents sold to Intel is the word "essential."

Historically, companies have not been shy to boast about the sale or purchase of LTE essential patents - normally defined as patents "related directly to technology that is strictly required to meet the technical specifications of the LTE standards." For example, analysts widely reported Nortel's control of seven patent families covering LTE essential technologies. Acacia similarly reported its acquisition of Adaptix resulted in acquisition of "130+ patents that are standards-essential to 4G LTE/LTE+."

By contrast, neither party released a statement using similar language to describe the patents IDCC is selling to Intel. In addition, only one article claims "at least some of [the patents are] standards-essential" but makes no reference to a source from either side to back up the claim. Standards-essential patents carry far more licensing value than non-essential patents for the simple reason that licensing candidates have more options when considering adopting non-essential technology. Availability of options can drive licensing rates down to a level slightly cheaper than the next more expensive non-patented option.

If IDCC managed to sell 1,700 non-essential 3G, LTE and 802.11 related patents for $225,000 each, then it might well have commanded a premium for patents that carry little licensing value - IDCC's other revenue angle. For its part, Intel might still value the sheer volume of patents above their true income potential simply to beef up their weak IP holdings relevant to mobile technologies.

Of course, the possibility still exists that neither party intended to a particular interpretation by leaving out a single word from their joint statement. However, statements from publicly traded companies about highly confidential transactions tend to be heavily scrutinized, edited and worded to convey value to investors while obscuring details about the transaction. On balance, logic slightly favors a conclusion that, if LTE essential patents changed hands, the joint statement would have said so.

If that conclusion holds, IDCC added value in three important ways. First, it thins the herd, so to speak, by shedding 10% of the least valuable patents in the portfolio. Second, IDCC likely saves several hundred thousand dollars in overhead and maintenance by offloading the portfolio. (Note: when Micron (NASDAQ:MU) sold 4000 patents to Round Rock Research, John Desmarais commented that the patents were managed by 27 different law firms and would have cost "millions" to maintain.) Finally, IDCC set a benchmark for future transactions and licensing discussions over the value of the remaining patents, many of which are reportedly LTE essential.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.