RPX/Alcatel-not so unusual but some good mystery and intrigue for Alcatel to announce

by Andrew Watson on 15 February 2012

Very interesting news announced this week that RPX has signed what appears to be a first, at least the first to be announced publicly,  in a deal to represent the Alcatel-Lucent patent portfolio to its members. I looked for an RPX announcement or release without success. For a PR hungry company, I wonder why not?

Reuters carried the news:

Joff Wild’s IAM blog also carries an interesting insights piece attempting to dig beneath the story.

The transcript of the call is interesting. Here is what Ben Verwaayen, CEO, had to say as reported on Morningstar. Notice by the way that he announces the patent (not patterns as reported) news within the first couple of minutes of the call starting, maybe trying to defuse some of the negative press comment that followed the announcement.

“Let me spend two minutes to clarify why this is an innovative approach and why we think it’s very important. It’s important because the first thing we are not doing is sell our portfolio, that’s not what we’re doing. It’s important to understand that. We have a position in the telco market for which it is very important that we have the strongest portfolio and patents in the industry and we will maintain to have that, 29,000 patents that we have. Working together with RPX, we discovered that the ability they have to do syndicate licensing where basically you’re part of a club, you pay for the usage of it, but you don’t own it because we own it, but you have the same protection as if you would buy it is a very innovative new way of looking to patent. It gives us a reach far beyond the classical reach that we would normally have because we don’t run a patent syndicate, we don’t run the capabilities in-house to go out and reach out of our industry to other industries for some of the patent reach, but they do. They have a capability that we find extraordinary interesting. Extraordinary interesting for two reasons; first of all, as Paul will, everybody remind – remind every single time, this is time-limited. This is not forever. So the opportunity to go do something is relatively short-term.

Second, we have the capability, if necessary if we are not satisfied to walk away. Third, it’s nonexclusive. So it allows us to do what we’d normally do. It gives us choice and it gives us an impact that we think is substantial*. I think innovation in many different ways of an organization is a sign of strengths. Some of the comments I read this morning are really I think not – are really not on the mark. This is about not selling the family silver. This is about getting a creative capability to leverage the assets that you have. That is what enterprise is all about. So, with that said, let’s look to Q4.”

* substantial. His CFO uses the same word below.

The transaction is explained here by Paul Tufano, A-L’s CFO in response to an analyst question:

 “ First of all, let me first explain the structure of this arrangement. First off, this is a limited time offer, and the way it will work will be RPX at a certain period of time to provide us a set of interested parties that want to license our product [presumably he meant patent] portfolio. If that amount is achieved, we will go forward to the next breakpoint at which time there is another check point. The arrangement will be between the individual company and Alcatel-Lucent. RPX is acting as a middleman in this case and the value of the transaction with RPX is the fact that RPX has a very large base of members that range a number of different industries. So, we viewed it as an opportunity to increase our breadth of coverage in terms of potential licensing activity with companies we probably would never have address before and to do it in a manner which is extremely positive. Now the patent portfolio that is being licensed is a specific portfolio. In future years if this relationship proves to be beneficial, there is an opportunity for additional licensing as we add to our portfolio. So, as I said before, I think, this gives – it’s an innovative approach. It gives us the flexibility to go to market in a different way than we did before. We have significant flexibility in terms of what we choose to do going forward, and we have an expectation of a dollar value or euro value that’s substantial*, but we’re not going to disclose that, because RPX has to work with their customer base to get toward that number.”

* substantial. Same word as Mr Verwaayen. Was that scripted or did he take his lead from his CEO?

Reading between the lines

  • RPX gets to market the A-L portfolio on what should be preferential terms to its 112 or so members, or so many of them to whom the portfolio is relevant.
  • RPX pays no fee.
  • There are no immediate license deals.
  • RPX members can say yes or no.
  • A-L has the option to either take deals offered or to walk away.
  • The transaction is over a subset of the A-L portfolio.
  • And is time limited.
  • And non-exclusive.
  • Allowing A-L to continue whatever licensing or monetisation efforts it was already pursuing.

This is a great story for RPX. At no apparent cost it gets some super PR and a precedent that will be attractive to its members and may attract other members. And it gets to move Alcatel-Lucent’s and its own share price by the mere announcement.

And what about from A-L’s point of view? With the company missing its financial targets for the year ended 2011, the intrigue and mystery behind this deal buys time for A-L management. Imagine the poor analyst trying to work out what questions to ask of the two Alcatel executives. Next thing you know another analyst, Oddo Securities has already put a billion dollar cash value on the transaction for 2012 alone-that would be an interesting piece of research to read. Really!!

But if Alcatel needed to remove some pressure from itself it worked, and the transaction itself moved the share price on the day.

“The patent deal is moving the shares today, just as much as the results,” said Odon de Laporte, analyst at CA Cheuvreux. “The markets find it reassuring because it will improve the financial situation of the group.”

Looking at the old style telecoms and networking companies, we’ve seen Nortel’s portfolio go for a whopping number, Nokia monetising its portfolio through some strategic selling and, under pressure from activist investor, Carl Icahn, Motorola extract monster value from the sale of MM to Google. Against these other immediately valuable deals, A-L’s looks backend loaded and a hedge but it should be assumed that management was under pressure to do something, and something they have done. With nobody any the wiser as to whether or not this is a good deal.

No press release or comment from RPX. Is this not a material transaction?

We wonder whether the foundations of this deal were made in RPX’s role in the Nortel patent auction. RPX apparently dropped out of the auction at a price of around $1.5bn arguing that there were too many strategic buyers in the Nortel auction. But, very simplistically, there should be parallels between the A-L and Nortel portfolios, and therefore some appeal for RPX members to take licenses. We’d suspect that RPX knows that it can already deliver a good number of licensees at the negotiated rate. We also wonder whether, with money obviously to spend, RPX’s members or RPX itself will be seeking to acquire parts of the A-L portfolio. A-L seem open to a deal and pressure will only increase on them if the substantial license revenues are not achieved as indicated.

We also wondered who initiated this deal?

Net effect. Win, win, win. Do you remember the Internet bubble when all a company seemingly had to do was to announce its Internet strategy and its share price would increase. Patents, it seems, can have the same impact.

 

 

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05.14.12 at 11:19 am

{ 3 comments… read them below or add one }

Fred Logue 02.16.12 at 7:55 am

It’s worth having a look through RPX’s end of year earnings call as well.

http://www.morningstar.com/earnings/earnings-call-transcript.aspx?t=RPXC&region=USA&culture=en-US

Fred Logue 02.16.12 at 8:40 am

Sorry for the second comment but if you look through the Q&A in the transcript there is a statement that ALU approached RPX and a hint that this was done as an alternative to an outright sale.

Andrew Watson 02.16.12 at 11:43 am

Thanks Fred. I spent two and a half hours digging around the A-L transcripts but ddn’t pick up that A-L had approached RPX. I also hadn’t heard the RPX year end call-I’ll take a listen to that. I also picked up the hints from A-L that they had been exploring other alternatives before settling on this one.

My only other overnight thought was that A-L could find themselves backed into a corner. They have set expectations that the license fees to be earned here will be substantial. As these returns are already being factored into the share price, they should expect some pressure to deliver.

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