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.