In mid-April, the media was full of reports about AOL’s US$1.056 billion patent sale to Microsoft. The following week brought news that Microsoft had flipped 650 of those properties to Facebook. Next came news that Intel spent US$70 million buying patents from Aware.
These transactions – coming on the heels of Nortel’s US$4.5 billion patent sale in mid-2011 – have certainly attracted significant media attention. Beyond the hype, however, the sales illustrate a fundamental shift in the way companies and investors view patents and has significant corporate governance implications.
From obscure legal instrument to valuable asset
There is no doubt the corporate executive spotlight has swung onto the monetary value of patent portfolios. No longer viewed as obscure, dust-gathering instruments, patents have vaulted into the corporate boardroom. Both transaction sizes and the per-patent-property prices are making C-level executives and board members pay attention. Not surprisingly, everyone is talking about patent monetization, and we have seen an uptick in requests for assistance with such projects.
This trend is raising important questions. What are patents worth and what drives that value? Importantly, what happens if executives think they have valuable patent properties and then discover they do not and what measures will they put in place to increase the odds of creating valuable patents? Finally, what effect will activist shareholders have?
What are patent properties worth?
Patent assets that are not worth much cannot be monetized or add to shareholder value. So any discussion about monetization must start with a discussion about what the patents are worth. Unfortunately, patent prices – like those for art, wine or real estate – are all over the map, as shown in the chart here.
This chart tracks per-patent property price for recent publicly announced sales. Prices range from about US$130,000 per property to nearly ten times that. And these prices are for “valuable” patent portfolios. Equally enlightening is the calculated average US patent value of US$78,000.1 If this figure is correct and the high point per patent is US$2.1 million, then there are a lot of patents worth very little.
Herein lies the challenge: how do you determine what a patent is worth? In wine terms, how do you know whether you have a cellar of Two-Buck-Chucks or a cellar of fine Bordeaux? As with wine, setting values takes an expert. For patents, this means a professional valuation person working with someone who analyzes each patent’s claims onto a product in the market. Despite what some “valuation experts” say, this exercise cannot be done automatically. And, like it or not, the process is costly. Fortunately, once it is done properly, a business will know what its patents are worth, which to keep or sell and, for those it keeps, how each relates to its marketplace.
And as with so many things: buyers drive prices and strategic buyers pay a lot more than “financial” buyers. This is particularly well illustrated in the chart below. All the high prices were strategic buys (Facebook, AOL, Google); the low prices paid were by financial buyers (i.e., those wanting to license the patents).
What this means for patent portfolio management
With such a wide range in values, it is inevitable that some CEOs will find their patent portfolios aren’t worth much or, at best, contain few valuable properties. I say inevitable because companies have been on a patenting binge over the past two decades, yet studies show the underlying R&D protected by patent filings today is a fraction of what it was 15 years ago. Add to that the fact that today’s patent applications are put together in half the time they used be. There will be a lot of disappointed CEOs.
How will CEOs react? Certainly, some will force their patent departments to move away from the “spray and pray” model of getting patents. Some will insist their patent portfolios be built with articulated value in mind, a seismic shift for the patenting process in most big companies today. Some CEOs may even ask their patent counsel to justify each patent property.
Corporate governance and the activist shareholder
These questions are exceptionally important from a corporate governance (and investor/activist shareholder) perspective. Clearly, one cannot expect to get paid a million dollars for a patent that is only worth 5 percent of that. Equally clearly, not all patents are worth a million dollars, or even $100,000, so one cannot expect to get paid Friendster-sized prices. An only slightly less obvious conclusion is that if one has numerous low-value patents, it makes no sense to keep paying attorney and maintenance fees on them. Yet surprisingly many companies have piles of these low-value patents or, worse, cannot account for their individual assets’ value. Certainly, CFOs are going to be taking a long, hard look at existing assets and asking why they should be kept and not sold or abandoned.
While CEOs and corporate boards are looking inward at patent portfolio management, they will simultaneously have to watch out carefully for activist shareholders. Some of the most recent patent property sales came after activist shareholders put pressure on company boards. As Intellectual Asset Management magazine’s blog has observed, ‘[T]his is an invitation for other investors in other companies to get interested in patents and how they are being used.’2
How much activist shareholder activity are we going to see in the patent field? Very likely a lot. This must become a major concern for C-level executives. They are the ones who will face the question “How much are my patents actually worth?” and they will have to deal with the fallout if a patent portfolio, long touted as being important, turns out to be worth very little.
Disturbingly, few companies with large patent portfolios know the actual value of their assets – a risky situation indeed in this day and age. If your company owns an unvalued portfolio, it is time to stand up and take action.
1 James Bessen & Michael J. Meurer, Patent Failure: How Judges, Bureaucrats, and Lawyers Put Innovators at Risk 112 (2008).
2 See this post.