Print | Share | Reprint

InterDigital to sell patent portfolio in pieces

by contributor Michael Brown | Published January 31, 2012 at 11:17 AM

InterDigital Communications Corp. hopes to close a deal for pieces of its patent portfolio in the coming months after an auction for the company as a whole failed to produce a suitor, according to the company's chief executive.

Potential divestitures for the King of Prussia, Pa.-based developer and licensor of wireless patents could be made in the company's noncore 3G and long-term evolution, or LTE, terminal unit (cellular device) patents as well as its wireless infrastructure patents, CEO William Merritt said in a phone interview.

In addition, the company will look to increase licensing sales with a target of $800 million in annual revenue by 2015, which is twice the $400 million in sales generated in 2010. Merritt said InterDigital will also target future patent acquisitions of its own.

The company's terminal unit patents, which dictate how wireless devices connect to and manage data transmissions, pose the most enticing acquisition target, as the royalties associated with these patents are more robust, Merritt explained.

These patents comprise more than half of the company's portfolio of about 19,500 patents and patent applications and are licensed to a plethora of technology players, including Apple Inc., LG Electronics Inc., Sony Ericsson Ltd. and Research In Motion Ltd., among others.

There are only a couple of thousand wireless infrastructure patent applications and patents, which dictate how a wireless network manages data and the speed at which this data is transmitted.

"InterDigital has been an inventor of core wireless technology -- the nuts and bolts of wireless technology -- that has become the standard over the past few decades," said Ron Shuttleworth, an analyst at research and investment banking firm M Partners Inc. who covers InterDigital.

Alcatel-Lucent SA and Siemens AG could be potential buyers for InterDigital's wireless infrastructure, since they have a number of technologies that form synergies with these patents and could perhaps better leverage their value, Shuttleworth noted.

While some of the patents are unlicensed, they would be a logical addition for companies looking to bolster a pre-existing portfolio of infrastructure patents, he explained.

In July, InterDigital announced it had hired Evercore Partners Inc. and Barclays Capital to advise in a strategic review. The company was rumored to be in the scope of technology behemoths such as Apple, Microsoft Corp., Qualcomm Inc. and Google Inc., but suitors were only looking to buy pieces of the company's patent portfolio and not the entire thing.

"The strategic options process gave us a head start in finding buyers to help move us forward in the sale of the pieces [of the patent portfolio]," Merritt said. "We already have a good sense of the buyers." (He declined to mention specific suitors.)

Although InterDigital has identified areas where it may look to divest, management hasn't come to a solid conclusion about exactly what or how many patents will be for sale.

"With the terminal unit portfolio, which is much larger [than the infrastructure portfolio], there is a point of diminishing returns from the value that we provide in patents in that space," Merritt said. "The question then comes, 'If you sell patents, when do you cut too much and wear into core business?' "

To that, Shuttleworth added another question. "How do you price the patents?" he asked.

The average patent and patent application is worth upward of $280,000 for InterDigital, given M Partners' initial $118 per share target price for the company -- almost $40,000 more per patent that Nortel Networks Corp. sold in 2010 while it was in bankruptcy.

Some of InterDigital's patents, however, could be valued higher, and others could be worthless, Shuttleworth said. He explained that, because of the size of InterDigital's portfolio, it's difficult to measure how many patents could fall into the latter category. The InterDigital portfolio as a whole is valued at more than $5.6 billion, Shuttleworth said.

While Merritt hopes to have a deal in place in the upcoming months, the timeline depends on a number of factors, including the type of deal that may be struck, he said.

"We have a strong balance sheet, which provides us with a lot of flexibility, so we don't have to take up-front cash. We have the flexibility to wait," he said. "If you want to do an all-cash, structured deal, you have to prove, through due diligence, the patents are solid and it could take more time. But, if a partnership structure [is put in place], the patents almost prove themselves."

Merritt asserted that many companies have been purchasing patents at high values over the past year. In a Jan. 23 conference call, he cited HTC Corp.'s acquisition of 82 issued patents from ADC Telecommunications Inc. for approximately $75 million -- an average of almost $915,000 per patent. Merritt also cites Acacia Research Group LLC's Jan. 13 announcement that it had acquired approximately 250 LTE-related patents and patent applications of Adaptix Inc. for $160 million -- an average of $640,000 per patent.

"While not necessarily indicative of all situations," Merritt said during the call, "these examples suggest that while patents are certainly carrying high values and for good reason, more pure patent-related transactions are occurring in the hundreds of millions of dollars instead of the billions."

While some aspects of the auction remain unclear, what is apparent is that InterDigital doesn't plan to idly stand by while it is stripped of noncore patents.

"The fact that we may seek to sell patent assets does not signal any change in our patent acquisition strategy," Merritt said in the conference call. "Like any good portfolio manager, our goal is to sell off some assets that are not providing a significant incremental value and purchase others that would optimize the value of our portfolio."

Despite the wireless telecommunications industry's lust for wireless Internet protocol and InterDigital's interest in monetizing its own expansive portfolio, the company has lost favor with investors since a Jan. 23 announcement that a strategic review of the company as a whole had been canceled.

Share:

Tags: auction | InterDigital Communications Corp. | InterDigital Communications Corp. CEO William Merritt | patent portfolio

Telecom, Media & Technology

InterDigital to sell patent portfolio in pieces

Free preview

Meet the journalists

Movers & Shakers

Video

Fewer deals despite discount debt

Sectors