On July 13, the Mission Intangible Monthly Briefing  looks at patents in a program titled Total Patent War.  To warm up our global audience in advance of the broadcast, we offer a guest note from Rob Aronoff, Managing Partner, Pluritas, LLC.

InterDigital-Intel and AOL-Microsoft Transactions, Add Cash & Unlock “Hidden” Shareholder Value

CEOs, Boards of directors, activist investors are only just now realizing that the cash generated by recent patent sales is only one part of their success. Additionally, hundreds of millions of dollars of heretofore “hidden” shareholder value has been unlocked without compromising competitiveness.

The InterDigital-Intel sale for $375 million in cash netted Intel buyer 1,700 patents. To achieve this InterDigital did not need to give away the store, as some in the financial media have reported. Additionally, InterDigital stock rose almost 30% in a single day of trading following the announcement.

Also overlooked by financial analysts in the recent sale by AOL of 925 patents and patent applications to Microsoft for $1.1 billion dollars has been its material impact on shareholder value. The deal not only generated for AOL holders than $1B in immediate cash, net of fees, which will be paid in the form of a one-time dividend, but it increased shareholder value virtually overnight by more than $600M, which has been sustained.

AOL stock is up almost 82% to date, and has leveled off at about $27 per share, slightly higher than the patent sale share price.

The transaction was instigated by Starboard Value LP, an AOL investor unhappy with the stock performance that at the time of the transaction owned approximately 5.3% of the company’s shares. Starboard Value will realize about $53M from the one-time dividend.

Out of Thin Air

But while the return to Starboard for raising the issue of hidden value in IP may very well concern some dissident shareholders who expected a higher return and a more orderly sale process, the real story is that more than half a billion dollars in market value was created out of ‘thin air’ by unlocking it through an IP rights transaction.

Reviewing the numbers, it has been widely stated in several publications that the AOL stock jumped 42% on the announcement of the patent sale to Microsoft. AOL’s market cap of $2.4B was $1.8B for weeks prior to the deal.

The question investors and fiduciaries should be asking is: Why aren’t other significant IP holders considering similar moves? If so, what are potential opportunities and impediments?

The global corporate landscape is littered with candidates ripe for similar win-win outcomes that can be generated from strategically leveraging patents. Pay close attention over the coming months, now that Wall Street is finally waking up to the financial potential of IP. More scenarios are likely to follow.

Too Many Warheads

Companies with IP rights should be thinking about a patent sale as an opportunity -- especially if not aggressively doing so gives dissident shareholders a reason to point a finger. The downside of patent sales is that a business may be “giving away” potential cross-licensing and future enforcement revenues.

But, in an era where cash is king, it often makes sense to take the money now. If necessary, companies can always find a reasonable and affordable way to deal with cross licensing and assertion needs. Retaining enough of their best IP to be credible is one method. That’s why AOL decided to hold on to 300, or so, of its patents, despite the large cash sale. It is unclear which of the some 18,000 patents and applications that InterDigital has retained, but, rest assured, there is plenty of value in what remains.

Much like downsizing a nation’s nuclear arsenal, a company’s patent capability should be proportionate to its needs. Holding too many important patents may be less necessary than it appears – and more costly to market value.

Six weeks have passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC).

Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness. Last month, we hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Once again, Society member Jim Singer of the Pepper Hamilton law firm and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 9/3/2009-11/22/2009. The first search was for the pairing of “Galleon OR Rajaratnam.” Jim then searched the resulting articles for the additional terms of McKinsey, IBM, or Intel. 

There were no citations meeting the search criteria prior to the government announcement of allegations. Following the announcement, the data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant for the first three weeks of the alleged scandal.



While the findings are not conclusive—McKinsey is privately-held whereas the other two are public—these data are consistent with our general observation that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test for the five weeks of data yields a p<.03, p<.001, p<.01, for the first three weeks, respectively, and then not statistically significant differences thereafter.

Thirteen days have now passed since the Chairman of the Galleon Group, the hedge fund at the center of a suspected insider trading ring, and several executives, have been charged. The fund has liquidated about 90 percent of its nearly $3.7 billion portfolio of technology stocks and other securities and will be consigned to history, shortly. 

Three of the companies caught in this scandal are going concerns. Their executives are accused of divulging confidential non-public information. Those companies are McKinsey & Company, IBM (NYSE:IBM), and Intel Corporation (NASDAQ:INTC). Of the three, McKinsey & Company has a widely held reputation for discretion – an intangible asset that is essential to their operational effectiveness.

We hypothesized that this reputation would help mitigate McKinsey’s headline risk. Evidence of this mitigation would be fewer articles in the business and legal press relative to the other two firms.

Society member Jim Singer of the Pepper Hamilton law firm, and author of the blog IP Spotlight, helped us with the analysis. Lexis Nexis searches were conducted combining 2 comprehensive databases - Business News Publications and Legal News Publications for the dates 10/1/2009-10/29/2009. The first search was for the pairing of “Galleon and Rajaratnam.” Jim then searched the resulting 112 articles for the additional terms of McKinsey, IBM, or Intel.



The data show that McKinsey’s name is less frequently associated than the other two firms with the disgraced hedge fund. This observation is statistically significant. It is consistent with our general contention that companies with strong reputations based on rigorous business processes make for sympathetic actors that are treated as victims rather than culpable agents when adverse events occur. In short, reputations arising from superior intangible asset stewardship help mitigate headline risk.

NB: Statistical analysis using the Chi Square test yields a p<.03 (statistically significant).

Former Fed Chairman Greenspan noted last year that in a market system based upon the intangible asset of trust, reputation has significant value. Madoff aside, trust is having a hard time on Wall Street. We share two recent stories of reputation malignment (vilification?) in the Financial services sector.
 
The first, reported by the Financial Times last Thursday, is that one in five hedge fund managers misrepresents their fund or its performance to investors during formal due diligence investigations, according to research from New York University's Stern School of Business. Researchers found that the most common misrepresentations by hedge fund managers was the amount of money they had entrusted to their funds; Performance and regulatory and legal histories are also often misrepresented.
 
The second, which broke widely on Friday, involves allegations of trading on insider information at the hedge fund, Galleon Group. According to prosecutors, co-conspirators of fund founder Raj Rajaratnam include a McKinsey & Co. consultant, an IBM (NYSE:IBM) senior vice president, an Intel Corp. (NASDAQ:INTC) treasury manager and two executives from the New Castle hedge fund group of the defunct Bear Stearns.

The reputation angle obviously interests the Society. But there is more. What really interests us is how McKinsey, IBM, and Intel will manage the headline risk. Will their intangible asset risk management systems allow them to characterize the malfeasance as the product of rogue actors? Or will they be held culpable for the non-compliance of their employees?

Stay tuned.