Billion-dollar-plus valuation of Yahoo’s Excalibur patent portfolio could be optimistic in current market

By Steve Brachmann
June 22, 2016

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“Yahoo” by Neon Tommy. Licensed under CC BY-SA 2.0.

Yahoo! Inc. (NASDAQ:YHOO), the multinational tech firm based in Sunnyvale, CA, has been experiencing a good deal of corporate turbulence in recent months. A recent filing with the U.S. Securities and Exchange Commission (SEC) unveiled company plans to reduce its workforce by 15 percent and exit offices in Dubai, Mexico City, Buenos Aires, Madrid and Milan. The filing states that the action is part of a “strategic plan to simplify the Company’s business and narrow its focus,” but others see it as part of a downward trend for Yahoo. Some news reports note that, with the plans for new layoffs, Yahoo’s workforce will be 42 percent smaller than it was in 2012 when Marissa Mayer was named CEO of the company. Through 2015 the stock seriously underperformed on the NASDAQ exchange, losing 35 percent of its value while the composite index rose nearly six percent.

It’s this environment of malaise within which Yahoo is trying to bolster its fortunes with the sale of an intellectual property portfolio involving about 3,000 patents and patent applications which the company recently reassigned to a subsidiary known as Excalibur IP. Some of the patents in this portfolio date back to the company’s initial public offering in 1996 and news reports from The Wall Street Journal indicate that some expect the portfolio to fetch a price in excess of $1 billion. Preliminary bids for the portfolio were expected in mid-June.

In mid-June, patent analytics service Innography released a blog post which breaks down the types of assets being offered in the Excalibur patent portfolio. 70 percent of the IP assets are filed under three Cooperative Patent Classification (CPC) sections with data processing seeing the greatest percentage, followed by e-commerce and network messaging. The post identifies the portfolio as a “young” one, having only 93 patents set to expire in the next three years and an 11.7 year average time remaining on patents which have been issued. About one-third of the IP assets are patent applications which are still in prosecution.

We got a chance to speak with Tyron Stading, founder of Innography. When asked to characterize the age of the portfolio, it was indicated that the portfolio was more like a tween entering the awkward phase just before its teenage years. In Stading’s eyes, one of the more interesting nuances in the case of the Excalibur patent portfolio is that it is unclear if Yahoo is including their foreign IP assets related to this portfolio as those reassignments have not yet appeared. “All we know now is that the U.S. intellectual property has been transferred,” Stading said. Citing a 2009 ruling on patent applications filed with the World Intellectual Property Office (WIPO), where patenting organizations can file in multiple jurisdictions at once, Stading noted, “there’s an issue that if you don’t execute and record assignments appropriately you can lose priority and thus lose the patent.” Innography’s analysis also identified a number of major tech firms which could be interested in buying the portfolio based on the number of forward citations of patents in Excalibur, the most substantial of these being Google’s parent company Alphabet Inc. (NASDAQ:GOOGL). “The next step will be to see who buys these patents, that will be very interesting,” Stading said.

The measure of the strength of the IP in the Excalibur patent portfolio has been measured by Innography’s PatentStrength algorithm which adjudicates assets based on basic citation analysis, including forward and backward citations, and regression analysis on litigated patents to determine which non-litigated patents might be litigated in the future. Based on the PatentStrength analysis, the portfolio being marketed by Yahoo contains 44 percent more patents meeting the ranking of “strong” when compared to benchmark portfolios.

The patent portfolio sell-off is just one of a series of divestitures which Yahoo may undertake in the coming months. Yahoo is also taking bids on its core Internet businesses, with reports of one bid from New York City-based telecom company Verizon Communications (NYSE:VZ) coming in at the $3.5 billion to $4 billion range according to close sources cited by BloombergTechnology. That article also indicates that bids of $5 billion for Yahoo’s core business, real estate and patents are likely to come from both Dallas-based telecom firm AT&T (NYSE:T) and Dan Gilbert, the founder of Quicken Loans. Interestingly, Internet services giant Google of Mountain View, CA, could sit out the entire bidding process over concerns of antitrust violations for which Google may be held liable were it to buy Yahoo’s IP portfolio; this analysis comes from Scott Cleland of research consulting firm Precursor.

But there’s a very good question to be raised as to whether this billion-dollar valuation of Yahoo’s patent portfolio will actually be met. A 2014 patent marketplace report published by patent risk management firm RPX Corporation (NASDAQ:RPXC) of San Francisco indicates that the average initial asking price for patent portfolios offered to RPX between 2010’s first quarter and the second quarter of 2014 was $3.5 million. The average portfolio size was only 11.4 patents but when applying that asking price-to-portfolio size ratio to the Yahoo portfolio, it would indicate that the initial asking price should be slightly above $920 million, less than the potential dollar amounts being reported.

In April, Business Insider published analysis of Yahoo’s existing assets which placed the valuation of the company’s entire patent portfolio at $3 billion. In March, Reuters reported on comments made by Yahoo CFO Ken Goldman that the company was seeking between $1 billion and $3 billion for sales of non-core assets, including patents and real estate properties, by the end of the year.

Some in the world of patent valuations have found good reason to question reported valuations as being very optimistic, including Kent Richardson, founder of ROL Group. Richardson argues that the methodology used to get the $3 billion valuation of Yahoo’s portfolio, as well as methods used for other valuations, are very light in the details. “We look more professional and just like every other industry when we explain how we come up with our estimates,” he said. An ROL blog post penned by Richardson and republished by IPWatchdog this April estimated the market price of Yahoo’s worldwide patent portfolio at $772 million, between a low point of $393 million and a potential high of $1.15 billion.

This isn’t to say that Yahoo’s portfolio isn’t valuable. To the contrary, Richardson noted how successful that tech company has been in selling patents in recent years. Yahoo’s latest 10-K filing with the SEC notes that through 2014, the company had gained $98 million through sales of its patents. The previous year, Yahoo took in pre-tax gains of $80 million through patent sales. “Very few companies generate that much money selling patents,” Richardson said, especially in consecutive years.

“The market is certainly improving but most would agree it’s still a buyer’s market,” said Michael Gulliford, current managing principal at Soryn IP Group. He noted that the recent U.S. Supreme Court decision in Halo Electronics v. Pulse Electronics, where the court held that damages could be tripled in cases of willful patent infringement, could alter the landscape somewhat, but other recent Supreme Court decisions are likely to negatively impact patent value. “It’s hard to believe that those core assets wouldn’t be tainted by Alice,” he said, citing the 2014 Supreme Court case which found a computer-implemented method as unpatentable subject matter under Section 101 of U.S. patent code. “If this sale had happened before Alice, the valuations would be multiples higher,” Gulliford said. He argued that Supreme Court case was monumental in patent devaluation and he attested to seeing patents licensed for seven figures before Alice that are now practically unlicensable. That’s not to say that Gulliford doesn’t think the Excalibur patent portfolio should attract high bids. “As someone in the business, I’d love to be wrong about everything I’m saying from a valuation perspective,” he said. Another factor mentioned by Richardson was the fact that the so-called smartphone patent wars have largely ended so the patents in related sectors are not as important from a defensive standpoint.

On the topic of the relatively young age of Yahoo’s IP portfolio, there seemed to be mixed opinions as to how that affected its value. Richardson felt that 11 years remaining in a patent’s term, close to the average length remaining in the Excalibur patent portfolio, was the perfect age for a higher potential value. “If you want to buy, the patents are old enough to be valuable today and you can use that value for the next 11 years,” he said. “The underlying technology in high tech stays in the products generation after generation for a very long time. Most of high technology and new technology products are built on the shoulders of giants.” Gulliford, however, noted that while the market was certainly hungry for these technologies, “it has to be weighted against the immaturities of the technology.” “It’s hard to see young, new applications selling for a lot of money on a per asset basis,” Gulliford added.

It’s worth noting that the Excalibur patent portfolio is not the sum total of all of Yahoo’s IP holdings. As Gulliford points out, there’s a group of 500 to 600 patents which has been carved out of the offerings. These patents are expected to be more closely related to Yahoo’s core business, which is being marketed separately from the Excalibur patent portfolio. “It almost implicitly seems that maybe those patents are the most valuable of all [of Yahoo’s] patents, particularly given their technological and defensive relation to the core Internet assets Yahoo is selling” Gulliford said. “Plus, I don’t think any entity would want to buy Yahoo’s Internet assets only to be sued for infringement on the Excalibur patents. So to me that would imply that the Excalibur patents don’t read on the core technology being sold or that the acquirer of the Internet assets is getting a license to the Excalibur patents.”

Analysis of Yahoo’s auction efforts published by online tech publication Ars Technica also raises question marks as to the idea that the tech company can engineer a major windfall through patent sales. That publication notes that the last major patent portfolio sale was the Nortel portfolio, purchased by the Rockstar Consortium for $4.5 billion. At 6,000 IP assets, it was the largest portfolio ever sold according to WSJ. Even with patent infringement lawsuits netting many millions of dollars from Cisco Systems (NASDAQ:CSCO) and Google, and then the $900 million sale of the portfolio to RPX, the most Rockstar could have recouped from its investment was about half of the portfolio purchase price. Whereas the initial Rockstar purchase priced the Nortel portfolio at about $750,000 per asset, RPX bought the portfolio after litigation for a cost of about $500,000 per patent family.

This isn’t the first time that a company has come to the patent market under strong financial turbulence hoping to be buoyed by a windfall patent sale. In the midst of Chapter 11 bankruptcy, imaging tech company Kodak (NYSE:KODK) of Rochester, NY, took a patent portfolio to market which some reports indicated could fetch as much as $4.5 billion. Instead, the company ended up selling and licensing the entire portfolio for a combined price of $527 million paid by 12 entities organized by RPX and Intellectual Ventures in a sale completed in February 2013. A lack of bidders, unlike what was seen in the case of Nortel’s patent portfolio, was a major reason why the portfolio was so far reduced in value. Yahoo isn’t under the same pressure to cover financial commitments in bankruptcy proceedings, so it could stay its hand if the right bid doesn’t come along. “I don’t believe that Yahoo will sell at firesale prices,” Richardson said.

EDITORIAL NOTE: On Tuesday, June 28, 2016, at 12pm ET, Gene Quinn will host a free webinar discussion of the Yahoo! patent portfolio sale and the current state of the patent market in general. Joining him will be Kent Richardson (Richardson Oliver Law Group), Michael Gulliford (Soryn IP Group) and Steve Brachmann (tech journalist for IPWatchdog.com). CLICK HERE to REGISTER

The Author

Steve Brachmann

Steve Brachmann is a writer located in Buffalo, New York. He has worked professionally as a freelancer for more than a decade. He has become a regular contributor to IPWatchdog.com, writing about technology, innovation and is the primary author of the Companies We Follow series. His work has been published by The Buffalo News, The Hamburg Sun, USAToday.com, Chron.com, Motley Fool and OpenLettersMonthly.com. Steve also provides website copy and documents for various business clients.

Warning & Disclaimer: The pages, articles and comments on IPWatchdog.com do not constitute legal advice, nor do they create any attorney-client relationship. The articles published express the personal opinion and views of the author and should not be attributed to the author’s employer, clients or the sponsors of IPWatchdog.com. Read more.

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There are currently 1 Comment comments.

  1. Anon June 22, 2016 8:27 am

    We have discussed previously how the internal treatment of patent assets may differ – and differ significantly – from the purchased assets treatment.

    Since these assets fall into the “acquired” category, no matter what “valuation” attaches to the purchase price, internal auditors have a fiduciary duty to properly evaluate worth – regardless of much was paid for the asset – even just bought assets.

    This is an area that the government needs to pay special attention to (and it should be recognized that such attention may be unwanted by those attempting to devalue the patent system – the longer that reality goes unrecognized, the longer the piper does not have to be paid).