Research In Motion (RIM) and the Art of Valuing Patents
Research in Motion, Inc (RIM), a leader in mobile communications (see one of their key patents, US5802312 here), has been in the news lately due to a weaker than expected earnings report which sparked concerns about RIM's true value. Goldman Sachs evaluated RIM's business components in order to come up with a book value - the value at which an asset is carried on a balance sheet. Consequently, based on this value, Goldman calculated a "fair market price" for RIM's stock. It does not surprise me that the debate about RIM's future stock price recommendations were heavily influenced by valuing RIM's patents - by far their most important and highest-valued assets. Jeffries, the global securities and investment banking group, came up with a liquidation value of $1B, if RIM sells off its patents, and $2.5B if RIM continues to use its patents. These two numbers, however, are well below RIM's estimated book value of $10B. It seems odd that the calculated liquidation value of RIM is so low, considering that the company is doing well, earnings-wise. But it goes to show that a company reliant on its patents is eventually judged and valued based on its patents.
The debate over RIM's value highlights the importance of patents in the mobile communications industry - this sector of the telecommunications industry has been growing at a very fast pace for almost two decades. For example, take a look at Apple's growth over the last 3 years, which was largely due to the success of the iPhone. The large blue chips in this industry, including Microsoft and Google, have been heavily involved in positioning themselves in the mobility market and protecting those position as best as possible. The highly competitive mobile communications market has spurred a buying spree of patents - motivated mainly out of a desire to protect themselves from patent infringement lawsuits. Recently, Microsoft and other companies partnered up to buy a highly sought-after portfolio from Nortel and Google bought Motorola Mobility for $12.5B. Did Google buy Motorola for its brand name or for its portfolio of 17,000 patents? It is generally accepted that Google did so mainly for Motorola's patents. As an aside, Google did not pay liquidation value for those valuable patents - Google paid a 60% premium on Motorola's previous day stock price. But getting back to Blackberry, is RIM worth it's liquidation value? RIM's roughly 2,000 patents are probably worth a lot more than $1B - $2.5B. But RIM's stock has plummeted since the Goldman Sachs and Jeffries reports. RIM may be losing market share, but does that mean the patents should be worth a liquidation value? This debate highlights the importance of valuing patents properly based on facts, research and using proper appraisal techniques.
Investment bankers may be intent on using liquidation values but a proper appraisal of patents should include a variety of factors, including liquidation value, the cost approach, the market approach and the income approach. When valuating patents, it is important to have an understanding of the patented product, the state of the market for such products and competing products. Then it's time to dig into the numbers. The cost approach calculates either the purchase price paid for the patents and/or the costs incurred in the research and development of the product, as well as the legal fees associated with obtaining the patents (which is no small expenditure). The easiest way to use the market approach is to find comparable sales of a similar patent. Finding comparable sales, however, is difficult due to the difference in products, the use of product, subtleties between patent designs and finding actual sales. The income approach uses a net present value (NPV) calculation. The NPV uses an aggregation of projected sales that are discounted over a period of time to calculate a value at the present time. Liquidation value basically takes the current value of a patent and cuts the value by 40%-70%. The four methods described above create a range of values which can be used for different purposes, such as attracting investors, getting loans, selling patents and projecting the potential stock price.
Liquidation value may not be the best way to value a patent or a company. In fact it can do more harm than good. Help your clients protect the value of their patents by getting a proper appraisal of their patent(s), which may be their most important asset.
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