As
But those estimates are unrealistically high — by a factor of 10, in fact. According to our analysis, based on publicly-available information as well as our proprietary technical and market-based “IPedia” analytics platform, Yahoo’s patents are actually worth no more than $200 million, and may be worth as little as $50 million.
To those not familiar with the Yahoo patent sale, the company is looking to divest approximately 2,648 IP assets (while retaining an additional 700 patents that it calls “core” to sell along with its operating business). To effectuate this transfer Yahoo has assigned these assets to a transaction vehicle known as Excaliber IP. Many of these patents are homegrown Yahoo assets, but some were acquired in strategic IP-rich acquisitions such as Yahoo’s $1.63 billion purchase of Overture in 2003, which owned AltaVista, an early Google search competitor.
In doing our valuation, we first looked at the IPedia scores of these patents, which are based on thousands of data points such as the patents’ claim strength, priority dates, reverse and forward citations, technology areas, market adoption, “key player” performance trends (assignee, inventor(s), examiner, art unit, etc.), transaction histories, litigation histories and comparable license and sale figures (compiled from our proprietary IPedia transaction database as well as public information). Not surprisingly, the IPedia analysis indicated noteworthy vulnerabilities in the Yahoo portfolio that I will address below.
We also examined recent Yahoo patent sales between 2011-2015. These generated approximately $300 million in revenues from prominent high-tech companies such as LinkedIn, Alibaba, Snapchat, and Huawei, among others.
The Yahoo patents being marketed cover a number of different technology areas, including e-commerce, search, messaging, and cloud computing. However, over 80% of these IP assets are categorized as software or business method patents. This is significant because the risk profile for such patents is now quite high as a result of two recent developments:
1. The 2014 Supreme Court’s decision in Alice v. CLS Bank, which significantly raised the patentability hurdle for software and business method patents.
2. The 90% kill rate of already-issued patents in Inter Partes Reviews (IPRs) and Covered Business Method Reviews (CBMRs) by the Patent Trial and Appeal Board (PTAB).
To put it bluntly, there is a high likelihood that a fair number of Yahoo’s software and business method patents will be invalidated if they are ever asserted, given that they were issued prior to the tightening of software patentability standards that followed the Alice decision and the launch of the PTAB’s post-grant reviews. This presents a great deal of latent risk to any potential buyer of Yahoo’s patent portfolio.
Another problem for potential buyers of the Yahoo portfolio are the encumbrances that result from existing licenses to the patents involved. In 2004, for example, Yahoo and Google settled patent litigation that resulted in a license agreement for the Overture patents, with potentially broader releases involving many of the other Yahoo patents now being marketed.
In addition, Yahoo and Microsoft also have a close commercial relationship that, among other things, involves a 2009 cross licensing agreement between the two companies that also provides for a fair market value (FMV) determination of future licenses of Yahoo patents to Microsoft (see their license agreement). And then there’s Facebook’s patent cross license agreement with Yahoo, signed in 2012 to settle a patent suit between the two companies.
These existing agreements likely remove three of the top bidders from the market for the Yahoo patents, and also eliminate three of the top licensing targets from any monetization campaign a potential buyer of Yahoo’s patents might seek to undertake. The value of Yahoo’s portfolio is thus greatly diminished – a significant consideration that is reflected in our valuation.
There are still other factors undermining the value of Yahoo’s portfolio, and these result from Yahoo’s aforementioned recent patent sales.
• Many of the best Yahoo patents have likely already been sold, given the reported top line $300 million cumulative sales figure, or are being retained by the Yahoo operating business as “core” assets.
• Companies that participated in those patent purchases, such as Huawei, Snapchat, Linkein, Google, Alibaba, Match.com, Pandora, and Visa, almost certainly purchased the most valuable patents from their perspective, making it less likely they will bid on a broader swath of Yahoo IP at higher price points.
• These purchase agreements may also have insulated the above buyers from certain liabilities with regard to the broader Yahoo portfolio. The only way to fully determine the additional rights transferred would be to access those confidential agreements.
Now let’s look at the comps. Some sources valuing the Yahoo portfolio have cited the high prices obtained in previous large patent sales, such as Rockstar’s purchase of bankrupt Nortel’s patent portfolio for $4.5 billion in 2011, Google’s purchase of the Motorola patent portfolio (as part of its purchase of the Motorola business) that same year for $12.5 billion, and Microsoft’s purchase of AOL patents for $1.1 billion in 2012. But those comparisons ignore the profound differences between those IP transactions and the Yahoo IP assets now up for sale.
For one thing, Nortel’s portfolio was larger and less risky than Yahoo’s. For another, Google’s purchase of the Motorola business was a strategic play in the wireless and telecom space, and in any event Google later sold that same Motorola business to Lenovo for one-quarter the price it originally paid. And finally, although the AOL patent portfolio purchased by Microsoft is most similar to Yahoo’s in makeup, the AOL patents were sold prior to the launch of the PTAB’s post-grant review process and the Supreme Court’s Alice decision, both of which have served, individually and collectively, to greatly devalue software patents.
If there are relevant comps for the Yahoo IP portfolio, these may be the Xiami purchase this month of approximately 1,500 patents from Microsoft for $40 million, and the sale of the Quimonda portfolio of approximately 7,000 patents to WiLAN for $33 million one year ago.
Given all the above, one also has to wonder just who might want to purchase the Yahoo patents. It’s unlikely that a non-practicing patent licensing entity or litigation financing firm would be interested, at least at the price range Yahoo is seeking, because the many existing licenses reduce the future licensing potential, and thus the market value, of the patents involved. One also has to question the viability of any licensing effort by a purchaser, given that so many of the Yahoo patents are older software and business method patents that could be vulnerable to invalidity challenges under Alice and the PTAB’s new post-grant review procedures. Indeed, even a relatively low-ball $100 million sale price for the Yahoo portfolio might be viewed as too risky by most potential purchasers, given the above factors.
Even in view of the above considerations, there may be a smaller strategic buyer of the Yahoo portfolio, but the price would have to make sense, given all the risks and encumbrances mentioned above as well as the fact that some of the best Yahoo patents have already been cherry picked by previous purchasers like Snapchat and Alibaba. This removes much of the benefit of market exclusion that these assets would provide to a smaller market player interested in buying Yahoo’s IP.
Keep in mind, however, that there are always anomalies, and there may be an irrational purchaser who falls in love with the Yahoo portfolio and has to have it (warts and all). Our opinion is that this is unlikely and would be misguided, but it cannot be discounted entirely.
Nonetheless, based on our valuation, the Yahoo portfolio is worth no more than $200 million at the high end and $50 million on the low end.
While an irrational buyer may step in and overpay — the combination of cash on hand and brand-name fascination overshadowing rigorous analysis often results in unwise decision-making — we feel strongly that anyone who pays more than $200 million will live to regret it.
