M&A Deals of the Year
Introduction   Apple and partners-Nortel   Google and Motorola Mobility   Access Industries -Warner Music   Cumulus Media-Citadel   Comcast-NBC Universal   H&R Block-TaxAct   Caterpillar-Bucyrus   Ares and CPPIB-99 Cents Only Stores   Grupo Bimbo-Sara Lee baking assets   BHP Billiton-Petrohawk   Peabody Energy-Macarthur Coal   Selling off Bank of America   Dish Network-Blockbuster   Amgen-BioVex   KKR et al.-Samson Investment   Pearson-Connections Education   Alleghany-Transatlantic   Breaking up Dexia

The Chapter 11 sale of Nortel Networks Inc.'s 6,000 patents and patent applications was one of 2011's most frenzied auctions. Over four days in late June, the value of the portfolio went from $1.5 billion to $4.5 billion as Google Inc. and a host of rivals led by Apple Inc. battled for technology embedded in many smartphones. The winning $4.5 billion bid made by Apple, EMC Corp., LM Ericsson AB, Microsoft Corp., Research In Motion Ltd. and Sony Corp. was 5 times greater than the $900 million stalking-horse offer Google made in early April.

The Nortel patent auction demonstrated just how important intellectual property was in hot technology markets. It was quickly followed by another IP-driven M&A deal: Google's acquisition of Motorola Mobility Holdings Inc. (see story on facing page).

The sale defied "the normal presumption that you generally make more money by selling ongoing businesses as a whole in bankruptcy," says Lisa Schweitzer, a partner at Cleary Gottlieb Steen & Hamilton LLP and bankruptcy counsel to Nortel, the U.S. arm of Canadian telecommunications equipment manufacturer Nortel Networks Corp. "In Nortel, we not only broke the businesses apart, we held back the patents and didn't just give them to the first bidder."

Nortel was able to employ that strategy because of the dramatic changes in telephony since Apple introduced the
iPhone in 2007 and Google countered with its Android operating system, open-source software that many smartphone operators have adopted. Apple and Google introduced those innovations despite having only a handful of patents in a sector where devices can incorporate thousands of them, and both companies needed relevant patents to ward off legal challenges from rivals with deep patent portfolios of their own.

Nortel's patents were particularly well suited for that purpose. About a third of the assets were applications pending before the United States Patent and Trademark Office, meaning that the technology is reasonably current and the patents will be valuable for years to come. And Nortel had not run an aggressive licensing program since it filed for bankruptcy in 2008, so many of the patents were not encumbered with licenses.

"There was an intersection between the patent story and the industry story here," says Paul Shim, a Cleary partner who was Nortel's corporate counsel on the sale. "The new industry leaders had few of these kinds of patents; that's what made them so valuable."

The Nortel auction was also the culmination of dramatic changes in patent practice over the past decade. Instead of being held only by companies that wanted to protect their IP and the products based on it, patents became liquid assets that were sought after not only by hardware and software companies but by so-called nonpracticing entities that bought patents to assert them against alleged infringers or to prevent others from doing so.

The evolution of a patent market helped drive prices up and attracted even large tech companies. Last April, for example, Microsoft, Apple, EMC and Oracle Corp. paid Novell Inc. $450 million for 882 software patents relating to the company's UNIX operating system.

The Apple consortium paid 10 times as much for Nortel's patents, a figure "so big that it caught the attention of people who hadn't traditionally paid attention to patents and patent portfolios, specifically boards and activist investors," says Steve Steger, a partner at Global IP Law Group LLC in Chicago who helped advise Nortel on intellectual property issues related to the sale. "The industry of buying and selling patents has been around for a while, but it's been the domain of patent professionals. After Nortel, boards are now asking if the market is valuing their company's patent portfolio appropriately, and if not, whether there are alternative ways their company can maximize the value of its patent portfolio."

Carl Icahn posed that very question to the board of Motorola Mobility Holdings on July 21, less than a month after the Nortel auction, and the company responded by agreeing to sell to Google for $12.5 billion on Aug. 15.