In February, Alcatel Lucent (ALU) initiated a corporate restructuring that included plans to license almost 9,000 U.S. patents, one third of which cover 4G and predecessor technologies. Much like the Kodak IP auction, this strategy was designed to harvest cash from the IP assets. However, the license project was recently cancelled, because the assets have generated no cash over the past seven months. So, what’s next? Maybe an auction? Can this IP create cash like other large 4G patent portfolios (Motorola Mobility for $5.5 billion and Nortel for $4.5 billion)? Would potential buyers (e.g. Google or Intel) be more interested in ownership rights rather than license rights?
A quick analysis of ALU’s 4G portfolio indicates that it's comparable in size to Motorola Mobility's 4G patents and approximately three times the size of Nortel's 4G patents. Given this, is it fair to assume that the ALU assets could fetch comparable prices?
In this situation, valuing the portfolio using a market comparables approach without any adjustments for portfolio quality is overly simplistic. A market comparables approach can serve as a starting point to value the ALU patents, but, insights in to patent quality and strength are needed to identify where on the price spectrum the value might fall. For instance, if the ALU patents cover fundamental 4G technologies, then parties like Google or Intel might be interested in buying them for reasons such as counter assertion. However, if the patents are peripheral to 4G or are very similar to the Motorola or Nortel IP, then there is a lower likelihood of a patent auction and significant cash flow.
ALU’s stock is currently trading around $1.15. If the quality and strength of these patents matches or exceeds the Nortel and Motorola portfolios, then maybe now is the right time to establish a long equity position.