The $1 billion plus valuation expectations Yahoo! Inc. (YHOO) has set for an auction of about 3,000 patents from its portfolio are “unrealistically high,” according to a new report by 3LP Advisors, an intellectual property investment advisory firm.

The report was written by a team of experts at 3LP including founding partners Kevin Rivette and Ralph Eckardt, partner David Morland, partner and general counsel Andy Filler and senior director Mark Gober.

The report was written after the Wall Street Journal reported that Yahoo! had hired Black Stone IP, the IP brokerage run by CEO Elvir Causevic, to sell the portfolio for more than $1 billion.

"Yahoo is exploring the divestiture of a portfolio of more than 3,000 non-core patents and pending applications covering a wide range of technology, including early-filed internet search, advertising, and cloud technology," a Yahoo! spokeswoman said. "This represents a unique opportunity for companies operating in the internet industry to acquire some of the most pioneering and foundational patents related to search and advertising. This divestiture is in line with our efforts to evaluate strategic alternatives for the company with the goal of maximizing value through the sale of non-core patent assets for our shareholders.”

She added that Yahoo! has not set a value for the patent portfolio and is leaving it up to Black Stone to establish the value of the portfolio through the auction process.

Representatives for Black Stone IP couldn’t be reached immediately for comment.

The valuation of the Yahoo! portfolio has come down significantly since SunTrust Robinson Humphrey’s analyst Robert Peck first pegged it at between $1 billion and $3 billion in April. Peck's range reflected the value of all of Yahoo!'s non-core assets including patents and real estate. His estimates were pilloried as out of touch with the patent market by many patent market watchers.

Kent Richardson, Erik Oliver and Michael Costa, 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.

The 3LP team said patent investors and company boards need to recognize the current environment for patent sales has been diminished by a number of changes to the legal environment including the America Invents Act of 2011, the U.S. Supreme Court’s eBay v. Merc Exchange ruling, which made injunctions a rarity, and the high court’s Mayo and Alice decisions, which drastically curtailed patentable subject matter. Indeed, the Alice decision effectively ended software as a patentable subject because it is based on an abstract idea practiced on a computer.

The 3LP team noted that Yahoo!’s unreasonable expectations appear to be based on the historical anomaly of a patent bubble between 2010 to 2013 when a number of $1 billion plus transactions occurred.

Google Inc. acquired tens of thousand of patents from Motorola Mobility in 2012 for $12.5 billion. The Rockstar Consortium, led by Apple, acquired thousands of patents from Nortel in 2011 for $4.5 billion. Microsoft also acquired patents from AOL in 2012 for $1.1 billion.

Since these purchases, the price of patent purchases has plummeted in what 3LP calls a “‘hangover’ effect,” raising the question about whether any of these companies will feel the need to spend another $1 billion on patents.

To be sure, Google this year and last year purchased a number of patents through its Patent Purchase Program. The company hasn’t disclosed how much it spent and how many patents it purchased. The program was successful enough, however, to serve as the impetus for an Industry Patent Purchase Program being managed by Allied Security Trust, the patent aggregator run by CEO Russell Binns.

Meanwhile, 3LP says patent valuations are down significantly since the bubble years, with no public deal of even $50 million in the last 18 months.

In 2014, RPX Corp. (RPXC) acquired a portfolio of patents from Rockstar for just $900 million, less than a quarter of the $4.5 billion Rockstar paid for the patents. Other patent sales greater than $50 million include Infineon’s purchase of the Qimonda portfolio for $320 million, Lenovo’s purchase of patents from Unwired Planet (UPIP) for $100 million and Spherix Inc. (SPEX) purchase of patents from Rockstar for $60 million.

Last year, WiLAN Inc. (WILN) acquired Qimonda from Infineon for just $33 million. Unwired Planet recently agreed to sell its patent portfolio to Les Ware's Optus UP Holdings for up to $40 million.

“Over the past 18 months the median value of patent transactions tracked by 3LP is approximately $150,000 per US issued patent - less than half the median value during the bubble years.”

The median value of patent transactions per patent was $381,000 in 2010, $333,000 in 2011 and $250,000 in 2012. Since then, the median value has fallen to $123,000 in 2013, $130,000 in 2014 and $156,000 in 2015.

3LP said the volume of patent transactions has declined over the past few years, because of fewer active buyers. The firm also noted that the majority of attempted patent sales do not close in a timely manner if at all.

Other reasons include the impact of the AIA which created the inter partes review (IPR) process and the covered business method (CBM) review process and allowed alleged infringers to challenge weak patents in the Patent Trial and Appeal Board for much less money.

The changes in the legal and regulatory environment will directly affect Yahoo!’s ability to achieve its $1 billion plus price, 3LP says.

Moreover, the 3LP team said the end of the smartphone wars, which drove most of the blockbuster patent deals, also suggests Yahoo!’s expectations may be too high.

Another factor working against Yahoo! is the fact that it has already sold or licensed many valuable assets. The 3LP team notes that in Yahoo!’s 2015 10-K, the company reports $339 million in gains from 2013-2015 patent sales. Such deals raised questions about whether Yahoo!’s best assets —the ones that would command the highest prices — are already gone.

The 3P team said that in this current down environment for patent assets, it may be difficult for buyers to justify paying as much as $1 billion.

Nevertheless, the 3LP team concedes that a strategic buyer could decide it has to have the Yahoo! portfolio and meets the asking price. In particular, a cash-rich company with a perceived need for IP such as an emerging Chinese tech company may be less price sensitive. A consortium of companies also might be able to pool together enough capital to approach the asking price.

Yahoo! and its advisors also may uncover numerous hidden gems in the portfolio and be able to demonstrate their value.

“The value will increase if the patent broker can uncover a large number of gems in the portfolio and show that the patents are infringed and valid.”

Yahoo! has previously indicated it wants to sell to an operating company that would use the patents to create products rather than a non-practicing entity that will simply enforce them against infringers.

The Yahoo! spokeswoman said however that while Yahoo! has always been a vocal and responsible actor in fighting so-called patent trolls, it isn't placing any restrictions on who could bid.

According to the Wall Street Journal, Yahoo! has set a mid-June deadline for bids for the portfolio.

The 3LP team says Yahoo! may benefit, however, if the process takes longer because several cases under review by U.S. courts “could swing the pendulum in favor of patent values.”

Indeed, the Supreme Court is considering several petitions related to the IPR process (e.g., MCM Portfolio and Cuozzo Speed Technologies) and patent damages (e.g., Commonwealth Scientific and Industrial Research Organization, Stryker Corp. and Halo Electronics) which could benefit valuation for all patents.

The 3LP teams says even if the Supreme Court eases up on patent owner rights, there’s still a long way to go to reach $1 billion.

—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899 or at dan@thepatentinvestor.com