Wi-Lan Inc. (WIN)’s back-to-back trial losses undermines the Canadian company’s strategy of buying patents and suing to obtain royalties, reducing its value in a potential sale.
Wi-Lan said yesterday it was considering a possible sale, after it lost a trial last week against Apple Inc. (AAPL) in which it was seeking $248 million. In July, it lost a trial against Alcatel-Lucent and Ericsson AB, though it later settled with Alcatel-Lucent.
The patent-buying binge of 2011 and 2012 that resulted in the purchase of $4.5 billion worth of patents from Nortel Networks Inc. and Google Inc.’s $12.4 billion deal to buy Motorola Mobility Inc. has cooled. At the same time, a series of court rulings and proposed legislation in U.S. Congress have limited the value of patents owned by companies that don’t make products.
“They won’t command the price they could have gotten a year ago,” said JiNan Glasgow, chief executive officer of patent-research company Neo Patents in Durham, North Carolina. “There’s been a trend showing that only the highest quality patents are standing up in litigation. The most value for patents is when they are actually making or selling products or services and they use the patents to keep competitors out.”
Wi-Lan shares fell 1.2 percent to C$3.26 at 9:33 a.m. in Toronto for a market value of C$394.3 million ($378.2 million). The stock rose 6.5 percent yesterday after the company said it would also consider a dividend payout, joint ventures and asset disposals.
The company “strongly believes in its current business strategy,” and its share price doesn’t take into account “its strong balance sheet, the value of its signed license agreements, its business prospects or the residual value of its broad intellectual property portfolio,” Ottawa-based Wi-Lan said.
Wi-Lan, which reports third-quarter results Nov. 6, had no further comment beyond its statement, said Tyler Burns, a spokesman for the company.
Wi-Lan could pay out at least $60 million, or about 50 cents a share, Justin Kew, a Toronto-based analyst with Cantor Fitzgerald LP, said in a note to clients yesterday.
The company has lost 20 percent since Apple won a patent-infringement trial on Oct. 23, thwarting its demand for royalties for wireless technology used in mobile devices. Wi-Lan has lost 28 percent this year, the worst performer of the S&P/TSX Information Technology index, which rose 27 percent.
BlackBerry Ltd., the struggling smartphone maker seeking a buyer, is the only other stock in the seven-member index to have lost value this year, declining 28 percent. Its patent portfolio could be a central attraction for bidders.
“There is a significant difference between BlackBerry launching a licensing program, where they can bundle know-how, industrial specifications, technical consulting, as well as the patents, and Wi-Lan continuing their patent enforcement operations,” said Erin-Michael Gill, managing director of MDB Capital Group, an IP-focused investment bank based in Santa Monica, California.
MDB has said BlackBerry patents may fetch $2 billion to $3 billion, though much less if they have been widely licensed.
Wi-Lan holds more than 3,000 patents and relies on royalty payments for all of its sales. The company had revenue of $20 million and a net loss of $7.6 million in the three months ended June 30.
The company, which had $158 million in cash at the end of the second quarter, will report its third-quarter results Nov. 6. Wi-Lan is forecast to post a net loss of $5.7 million, according to the average of three analysts surveyed by Bloomberg.
Todd Coupland, a Toronto-based analyst at CIBC World Markets Inc., said the company is worth C$3.67 a share, based on the licensing deals it’s already signed and the cash on its balance sheet. Any buyer, he said, would be getting a free option on any future licensing deals.
“Wi-Lan’s assets would be of interest of any number of consumer electronics manufacturers, however many of the most probable acquirers are likely already licensed,” Gill said.
Other patent-licensing companies, like Acacia Research Corp. (ACTG) based in Newport Beach, California or Wilmington, Delaware-based InterDigital Inc. (IDCC), may be interested, along with private-equity investors, Coupland said. Apple and Google Inc., who were responsible for several of the past big patent deals, are unlikely to buy the company, he said.
“They essentially have beefed up their patent portfolio so they’re in a position to defend the products in their pipeline with the IP they have on the books today,” he said. He rates Wi-Lan sector underperform, the equivalent of a sell, with a price target of C$3.
While prices have “plateaued” from a year or two ago, there’s still a market for buying patents that are then used for royalties or a competitive advantage, said John F. Martin, chief executive officer of Austin, Texas-based Innography Inc., a maker of software programs to analyze patent portfolios.
“We’re seeing more patents for sale than ever before,” Martin said. “The patent intermediaries are treating patents as assets and determining how to best monetize those.”
Wi-Lan, which developed some of its own technology and bought others, owns patents in the area of signals, antennae, wireless communication and networks, and most last beyond 2020, according to Innography data. That would make it attractive to potential buyers, though the recent trial losses will be a factor in any eventual price, he said.
“Litigation is hugely risky,” Martin said. “You never know what’s going to happen when you put a technical patent claim in front of a jury.”
A series of U.S. court rulings since 2006 have made it easier to invalidate patents, and lessened the amount that can be collected in damages. The U.S. Congress is considering even more legislation that could further reduce the value of patents owned by licensing companies.
In a July interview, Wi-Lan Chief Operating Officer Michael Vladescu said the legislative proposals were aimed at curbing abusive litigation tactics, like companies that blanket entire industries with letters demanding cash to avoid a lawsuit. More than 90 percent of its licensing details didn’t require a lawsuit, Vladescu said.
Martin said companies need ways to access patented technology, and licensing firms will remain a popular business model.
“I think it’s more a question of what Wi-Lan is deciding to bring forward in terms of its patent-licensing program, as opposed to all of a sudden the patent-licensing market’s going to go away,” Coupland said. “I think it’s more a Wi-Lan issue.”
All the legal changes have made it harder to win against big companies like Cupertino, California-based Apple, which can afford the costs of going to trial so they don’t have an incentive to settle, Glasgow said.
“It’s been declining in terms of overall wins and returns on investment that would cause funds to want to buy as many patents as possible,” she said.
Apple has done this before. It fended off a patent case that Eastman Kodak Co. said could have meant $1 billion in new royalties. After Kodak filed for bankruptcy last year, Apple joined with a group that included Google and BlackBerry Ltd. (BB) to buy the patents for $525 million.