BlackBerry Search for Bidders Depends on Patent Stockpile

Even as BlackBerry Ltd. (BB)’s sales tumbled in recent years, the company continued amassing patents, building an intellectual-property hoard that’s now central to its effort to entice bidders.

The struggling smartphone maker received 986 patents last year, a 49 percent increase from 2011, according to figures compiled by the Intellectual Property Owners Association. BlackBerry’s patents are valued at anywhere from $1 billion to $3 billion, depending on how many of them have already been licensed out, analysts and patent experts estimate.

Working in BlackBerry’s favor: The patents cover similar technology as Apple Inc.’s intellectual property, and much of the portfolio is only a few years old. The downside is that the market for such assets has cooled. Previous patent buyers such as Apple (AAPL) and Google Inc. amassed broad portfolios in patent deals two years ago.

“This is an incredibly volatile market,” said Ron Laurie, managing director of Palo Alto, California-based Inflexion Point Strategy, who advises companies on patents. “It all depends on perceived demand and strategic value.”

A higher patent valuation would help the company as it seeks offers better than Fairfax Financial Holdings Ltd. (FFH)’s tentative $4.7 billion buyout proposal, even if it means breaking the company up to get the fullest value for the assets.

Patent Mentions

Apple, whose iPhone is now the best-selling smartphone, cites BlackBerry’s technology 1,295 times in its own patent applications, according to MDB Capital Group LLC, a Santa Monica, California-based patent-investment bank. The rivals credit each other more than any other two North American device makers. Companies are required to identify competing technology to ensure they aren’t claiming something already patented.

Lisette Kwong, a Waterloo, Ontario-based spokeswoman for BlackBerry, and Kristin Huguet, a spokeswoman for Apple, declined to comment.

Given its connections to Apple and an average patent age of just 3.4 years, the portfolio may fetch $2 billion to $3 billion, according to MDB. That value may be lower if BlackBerry has already licensed much of its technology, said Erin-Michael Gill, managing director of MDB Capital. Widely licensed patents have less use for new deals or court challenges.

‘Trivial Amount’

“If that’s the case, the financial buyers no longer have much interest — and the strategics don’t need them,” Gill said. “Then it would go from multibillion dollars to a trivial amount, probably just a few hundred.”

MDB’s estimate reflects what the patents would fetch as stand-alone assets without liabilities a buyer of the whole company would face. The cost of shutting the hardware unit could be $800 million, according to BMO Capital Markets.

Raymond James Financial Inc. (RJF) pegs the value of BlackBerry’s patent portfolio at about $1.6 billion, with the phonemaker’s enterprise network of servers at $550 million to $1.1 billion. Add those assets to the $2.6 billion in cash the company had at the end of last quarter, and you get close to the $4.7 billion Fairfax is offering.

BlackBerry, which redefined what a phone could do more than a decade ago, has been eclipsed by Apple and Samsung Electronics Co. (005930), which offered a slicker range of smartphones and tablets. BlackBerry’s share of the global smartphone market shrank to 2.9 percent in June — down from 19 percent four years earlier –and last quarter sales plunged 45 percent from a year earlier.

BlackBerry slipped 1.6 percent to $8.25 at the close in New York. The stock has fallen almost 31 percent this year and remains more than 90 percent below its 2008 peak.

Potential Bidders

Fairfax, BlackBerry’s largest shareholder, is trying to line up financing and partners for its bid to take the company private. BlackBerry co-founders Mike Lazaridis and Douglas Fregin, who together control 8 percent of BlackBerry’s shares, said this month they’re also mulling a bid. Lazaridis holds 178 BlackBerry patents, according to MDB.

After signing a nondisclosure agreement, Cerberus Capital Management LP is in the early stages of considering an offer to acquire all of BlackBerry, a person with knowledge of the situation said last week. Lenovo Group Ltd. also signed a nondisclosure agreement and is actively considering a bid, the Wall Street Journal reported last week.

Fregin and Lazaridis declined to comment on any specific interest in the patents through their spokesman Mike Sitrick. Peter Duda, a spokesman for Cerberus, also declined to comment. Spokesmen for Fairfax and Lenovo did not immediately return messages seeking comment.

‘Including Apple’

In addition to patenting more of its own technology, BlackBerry has also bought patents from bankrupt Nortel Networks Corp. (NRTLQ) and built a whole new operating system. Cupertino, California-based Apple received 1,136 patents last year.

Patents last 20 years from the date of their application, making BlackBerry’s 3.4-year average appealing, Gill said.

“There’s 15-plus years of useful life to this portfolio, which is significant,” he said. “Anybody that cares about Apple is going to care about this portfolio — including Apple.” Not all patents are created equal. In the typical portfolio, as little as 5 percent of patents have any real value as a fit with other companies, Laurie said. That makes it hard to predict what BlackBerry’s ultimate sales price will be, he said.

‘Weird Business’

“The market’s signaling a viewpoint that what’s important is what people think rather than what’s in the portfolio,” Laurie said. “It’s a weird business.”

BlackBerry’s 9,268 granted patents and applications include 190 patents related to information security, which remains the core of its appeal to government, bank and military customers like the North Atlantic Treaty Organization.

While the BlackBerry 10 operating system failed to resonate with consumers, its underlying QNX technology is a platform for devices that manage nuclear-power plants, car info-tainment systems and unmanned aerial drones for the U.S. military. Customers that use QNX include Porsche, Cisco (NOK1V), General Electric Co. (GE) and Caterpillar Inc.

Even with those assets, BlackBerry is unlikely to be able to command the same premium as Nortel or Motorola Mobility Holdings Inc. did for their patents in 2011 because the market has changed, Laurie said. Back then, Apple, Google and Microsoft Corp. were battling in court over smartphone technology. Lately, they have refrained from new lawsuits against each other as they work through the old cases. That means they may not need to buy more patents, Laurie said.

Nortel Auction

In July 2011, a consortium of five companies led by Apple won the auction for a portfolio of more than 6,000 patents from Nortel for $4.5 billion, compared with Google’s initial bid of $900 million. BlackBerry paid about $770 million for its share.

Six weeks later, Google agreed to pay $12.5 billion for Motorola Mobility, another former mobile-phone pioneer that had fallen on hard times, primarily for a patent portfolio it could use as a bulwark against litigation involving its Android operating system.

A more recent deal by Nokia Oyj shows patents still have plenty of value, including their ability to create fresh revenue.

The Espoo, Finland-based company, which last month agreed to sell its handset business to Microsoft for $7.2 billion, kept control of its patents, which now generate more than 500 million euros ($676 million) a year in licensing revenue, its annual report shows. Since similar portfolios generate more than $1 billion a year, BlackBerry should be able to average at least $100 million in licensing revenue annually, Gill said.

“Even if strategic buyers like Apple, Google or Samsung don’t have the same enthusiasm that they might have had two years ago, the floor value a financial buyer would put on the assets means it’s still going to go for a meaningful amount,” he said.

Source:Bloomberg