Monday, June 25, 2012

(BN) Investment Banks Seek Business in Patent Deals as M&A Work Slows

June 25 (Bloomberg) -- Amid the dearth of global mergers and acquisitions, a handful of investment banks are finding business advising companies on patent sales.

Lazard Ltd., Evercore Partners Inc. and Barclays Plc are banking on a turf typically dominated by lawyers. While global mergers and acquisitions volume is down 27 percent so far this year, patent deals have jumped in the past 12 months to $18.8 billion from $450 million the year before, according to calculations based on data compiled by Bloomberg. The competition among Apple Inc., Google Inc., Microsoft Corp. and Facebook Inc. to dominate the wireless market largely accounts for the rise.

"Patents have historically been a small, private and illiquid asset. Now you have money piling in from all kinds of sources," said Robert Heath, head of corporate development at RPX Corp., a San Francisco-based firm that buys and licenses patents.

For technology companies patents have become a valuable asset to wield against competitors and to defend themselves against intellectual-property infringement lawsuits. Activist investors including Carl Icahn and hedge fund Starboard Value LP have been riding the trend, urging companies such as Motorola Mobility Holdings Inc. and AOL Inc. to extract value from their patents as well.

'Niche Asset'

Until recently, most Wall Street firms stayed on the sidelines in patent deals because they've been "too much of a niche asset," said Craig Opperman, partner and intellectual- property asset specialist at law firm DLA Piper LLP. "Lazard, Evercore and Barclays are the banks that I come across the most" in patent deals, said Opperman, based in Palo Alto, California.

Lazard's specialty is selling patents out of bankruptcy, honed when it advised Nortel Networks Corp. on its restructuring after it filed for Chapter 11 protection in 2009.

The Bermuda-based investment bank's strategy was to first sell Nortel's operating assets, making sure not to give away each asset's underlying patents, said David Descoteaux, a New York-based restructuring banker at Lazard. Then it turned to selling Nortel's 6,000 patents that are part of the wireless industry standards for devices, the so-called 4G high speed technology.

After 18 months of negotiations and an auction, Nortel sold the patent portfolio last year to a group including Apple Inc., Microsoft and Research in Motion Ltd. for $4.5 billion --almost quintupling Google's initial offer of $900 million. The patents fetched a price higher than all of Nortel's other asset sales combined.

Advising Google

"Banks are contributing to make the patent market more liquid by attracting more potential buyers," said David Berten, founder and partner of Global IP Law Group LLC, a Chicago-based law firm, which advised Nortel together with Lazard.

Lazard also advised Google last year when it agreed to buy 100 percent of Motorola for $12.5 billion. The deal was largely motivated by Google's desire for Motorola's patents, after it lost its chance for Nortel's. The sale came a month after Icahn urged Motorola to explore alternatives for its patents.

For Evercore, a New York-based banking boutique, patents will represent as much as 20 percent of its technology business this year, up from 5 percent a year ago, said Naveen Nataraj, a technology banker.

Nortel, AOL

Evercore advised AOL together with Goldman Sachs Group Inc. when it agreed on April 9 to sell to Microsoft its patent portfolio for about $1.05 billion, more than triple the $290 million value patent-advisory firm M-Cam Inc. had estimated. Starboard, with a 5.2 percent stake, had been agitating for an auction of AOL's patent.

"The success of the Nortel and AOL patent sales has added to a growing awareness among large patent holders of the value trapped in their portfolio of inventions," said Nataraj.

Unlike the boutique investment banks, London-based Barclays parlays its balance sheet to help patent-licensing companies raise equity and debt financing. It worked on six patent-related transactions in 2011 compared with none in the two previous years.

"Big banks like Barclays can't ignore the trend because too much transaction volume is at stake," said Kirk Kaludis, who runs its communications technology practice in Menlo Park, California.

Barclays was the lead underwriter on RPX's $160 million initial public offering last year. Barclays also placed privately this year $225 million worth of shares in Acacia Research Corp., which develops, buys and licenses patented technologies.

Banker Flops

Bankers have had their flops. Last year, Evercore and Barclays advised InterDigital Inc., a mobile-phone technology designer with more than 19,500 patents, on attempts to find a buyer. InterDigital called off the auction in January as bids came in lower than expected, according to a person close to the situation. Evercore alone advised InterDigital when it agreed to sell Intel Corp. roughly 1,700 of the patents for $375 million, InterDigital said on June 18.

Lazard failed to sell 1,100 imaging patents owned by Eastman Kodak Co. last year as the photography pioneer tried to avoid bankruptcy. Lazard is again trying to sell the portfolio for Kodak, which filed for bankruptcy protection in January.

Valuing a patent is as much art as science. It varies based on such factors as the extent of its licensing, the strength of its validity and its expiration date, said Mike Lasinski, founding partner of 284 Partners, a patents service firm based in Ann Arbor, Michigan. Often litigation is the only way to assess a patent's value.

To reflect the longer time spent on a patent sale compared with an average M&A deal, Lazard charges a success-based fee and a monthly retainer, said Descoteaux. Evercore's fees are success-based like those of a normal deal, said Nataraj.

"It's traditional M&A with a few important tweaks and some esoteric aspects," said Nataraj.

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