Yahoo! Inc. (YHOO)’s patent portfolio, which the company has estimated is worth anywhere from $1 billion to $3 billion, likely won’t be of value to anyone but the eventual buyer of the venerable Internet search engine pioneer, patent market observers said.
Yahoo!, which put itself up for sale in February, set a deadline of Monday April 18 for bids. Yahoo! hired Goldman Sachs Group Inc., JPMorgan Chase & Co. and PJT Partners Inc. to provide financial counsel, according to Bloomberg.
Bidders for the whole company are expected to be other giant technology companies such as Verizon, AT&T, Comcast Corp., Google Inc., Microsoft Corp. as well as potential strategic buyers from Asia including Alibaba, Softbank, Tencent Holdings Ltd. and Qihoo 360 Technology Co. Ltd. Private equity firms General Atlantic, TPG and Kohlberg Kravis Roberts also are reported to be considering buying Yahoo! as well.
Yahoo! officials on its most recent earnings conference call said its patent portfolio and real property was worth from $1 billion to $3 billion. The company has emphasized its interest in “responsibly monetizing” the portfolio, which suggests it doesn’t want to sell to a non-practicing entity.
Representatives of Yahoo! didn’t respond to a request for comment.
Robert Peck, an equity analyst at Sun Trust Robinson Humphreys, has said in a note to investors that based on conversations with IP experts he believes Yahoo!’s patent portfolio could be worth even more than $3 billion.
“We want to emphasize that we are not patent experts," he said in the note. "However, we do believe that any serious bidders are retaining experts to help them understand the value of Yahoo’s portfolio. Recall that AOL (a much smaller company than Yahoo) was able to sell its patent portfolio to Microsoft (MSFT, $54.65, NR) for $1.1 billion in 2012."
“Given Yahoo’s early presence, long history, and acquisition history (Yahoo has acquired more than 100 companies since it was founded in 1995, including Broadcast.com, GeoCities, and Overture), we believe there could be significant value in the IP. Conversations that we have had indicate the strong patents that could fetch more than $3 billion in aggregate if sold to a large enterprise or a consortium."
In an interview, Peck declined to name the IP experts he talked with. He said his estimate of $3 billion was “in the ballpark” based on Yahoo!’s own estimate.
He also indicated it's possible Yahoo! could negotiate a separate deal for the patent assets and offer a perpetual license to the patents to acquirer of the whole company.
“Yahoo!’s patents are worth a lot today,” said Joseph Siino, president of Via Licensing Corp., who was senior vice president, global intellectual property and business strategy at Yahoo! from 2005 to 2009. “It is a very valuable portfolio. However, in my opinion, the portfolio was worth far more several years ago. This is due not only to changes in U.S. law, but also to value that has already been extracted, removed or otherwise has dissipated from the portfolio for a variety of reasons during recent years.”
Others have criticized the estimate as out of touch with the current state of the patent market in the U.S.
“The general value is off by an order of magnitude,” said Don Merino, the former managing director and founder of Transpacific Advisors Ltd., a unit of Transpacific IP Group in Taipei. Merino launched his own firm Merino IP Consulting earlier this month.
“People don’t understand how the U.S. has devalued software patents thanks to Google,” Merino said. “While 10 years ago Yahoo!’s patent business might have been worth $3 billion, today it isn’t.”
Merino said Yahoo!’s bankers may be trying to generate more buzz about Yahoo! by leaking speculative information on the value of the patent portfolio.
“We’ve seen this before. The Lazard guys were very successful” selling the Nortel patents to the Rockstar Consortium in June 2011. “They’re trying to replicate what Lazard did. Everything old is new again. It’s all about fee generation.”
Writing in an opinion piece on IP Watchdog, Kent Richardson, Erik Oliver and Michael Costa, of of the law firm of Richardson Oliver, estimated that Yahoo!’s patent portfolio is worth anywhere from $393 million to $1.15 billion, with $772 million being their average estimate.
Richardson said in an interview that his range was based on Yahoo! selling the patents individually rather than together. He said if sold in bulk they would probably bring in only 20% of his range or $78.6 million to $230 million.
Others see an effort to use the transaction to set a baseline for future deals or licensing discussions.
“A purchaser may want to shop the patents, or just want to use the transaction to set a baseline for licensing discussions,” said Bruce Berman, CEO of Brody Berman Associates, a New York-based IP advisory firm. “If the acquirer was Verizon, for example, it would give their relatively limited portfolio a boost. Market price is important if for no other reason it provides some indication of the patents’ license ability.”
Berman said the good news is that “even in a worst case scenario, in a terrible market, the patents appear to have at least market value in the ‘hundreds of millions of dollars.’”
“It’s unconscionable that Sun Trust equity analyst Robert Peck arrived at $3 billion, numbers that others are refuting by as much as tenfold,” Berman said. “There is a history of these over-valuations on the part of equity analysts, and these people are doing no one a favor by pulling them out of their rear end, or bowing to client relationships.”
Louis Carbonneau, the CEO of Tangible IP, a Seattle based patent brokerage, said Richardson and Oliver’s “number is probably closer to reality. But the fact is, unless they spin the patents out later, we are all speculating on a deal that won’t really get done, as they will simply be among the assets of a company sold as a whole for a given price.”
Moreover, Carbonneau said these patents “will have a very different value to different buyers, depending on who owns them, whether they help in deterring lawsuits, how exposed is the owner vs other companies’ patents, whether they support commercial products that differentiate themselves from others and, last but not least, whether they end up being asserted/monetized.”
The wide range of values for the patent portfolio suggests the dearth of information known about the portfolio, such as to whom the patents are already licensed and Yahoo!’s litigation track record.
To be sure, the days of billion dollar patent portfolios are well in the past illustrated by the $900 million RPX Corp. (RPXC) paid for the Nortel patents to the former Rockstar Consortium after Rockstar paid $4.5 billion for the portfolio in 2011.
The value of patents for use in enforcement actions has plummeted as alleged infringers have learned how to use the inter partes review (IPR) and covered business method (CBM) review processes under the America Invents Act to delay actions in the district courts and possibly invalidate patents at the Patent Trial and Appeal Board.
Infringers also can count on a court system including the Court of Appeals for the Federal Circuit and the U.S. Supreme Court that is highly skeptical of large damages awards, especially by so-called patent trolls or non-practicing entities. The high court also dealt NPEs and other patent owners a blow with its infamous Alice decision, which in 2014 eliminated business methods and software as patentable subject matter.
Suddenly, what the Supreme Court has called the “cottage industry” of software-patent focused NPEs found itself cut off from what had been a very lucrative money-making enterprise.
“There’s only two ways to monetize patents: by licensing or litigating, or by using them to keep people out of your business,” said a patent market observer, who declined to comment because he is workinh with a major investor in Yahoo!.
“The value of patents has plummeted for licensing and litigating patents. The value of patents to defensively exclude others from a particular business approaches zero because it closely matches the value of the underlying business.”
It isn’t clear whether Yahoo! has ever effectively asserted its patents in such a defensive way or how those efforts panned out.
“I can’t imagine how a software patent has any source of value at all.”
“If they have to assert these patents to protect their exclusivity, they have much bigger problems than the de minimis value of their patents. No one is going to assert these patents.”
“No one is going to pay real money for the defensive value of those assets. I’d say the same thing if we were talking about Google’s patents.”
Other patent market observers agreed that the value of Yahoo!’s patent portfolio underscored the current state of Yahoo!’s shrinking revenue and profits and the state of the patent market in general.
Moreover, it also reflects the flawed thinking that six years ago allowed financiers to mine the bankruptcies of companies such as Nortel for assets that could be monetized.
With a few large wins based on high quality patents such as by Rob Kramer’s Altitude Capital Partners, the space soon mushroomed into an industry where the quality of the patent no longer mattered.
Of course, the AIA, Alice and other Supreme Court rulings soon changed that calculus. Suddenly, the tide went out of the market and revealed some extremely spare pickings. This led many patent investors to realize that they had backed some questionable businesses.
“If Yahoo ends up ‘monetizing’ its patents through direct or indirect litigation, it'll once again confirm that investors should question the competence of the management of any company that has to do so,” said Lee Cheng, the chief counsel for Newegg Ltd., the Los Angeles-based online computer retailer. “They should sell or short the stock.”
Cheng said he hopes Yahoo! can turn around operationally and strategically “as I've been a fan since they started and I have friends who work there.”
“Well led and managed companies make products and services that are competitive in the marketplace. Poorly led and managed ones desperately leverage existing assets and sometimes improperly.”
Erich Spangenberg, the founder and owner of IP Navigation Group, agreed that no one in the U.S. is likely to see enough value in Yahoo!’s patents to make up for the risk in buying them alone.
“Without knowing who is licensed, it is impossible to place a value on these patents,” Spangenberg said. “Undoubtedly, Alice impacts this portfolio as well.”
Spangenberg said that making some reasonable assumptions, an Asian buyer may emerge in the $750 million range. “If the number is much below this, Verizon (or other strategic buyer) will pick them up as part of their likely acquisition.”
Spangenberg said a private equity buyer for the entire portfolio is unlikely. There’s “too much risk and it’s too big a number. A strategic Asian buyer will pay more.”
Asked about the huge divergence in the value of Yahoo!’s patent portfolio, Spangenberg said “it is the silly season — my favorite are the ‘price per patent’ types. If I had one $1 billion patent included with 99 patents that were worthless, the value is not $10 million per patent. It is a mathematical fact, but one that is not relevant.”
—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899 or at firstname.lastname@example.org