Tuesday, April 12, 2016

How could Yahoo's patents be worth $4b?

Four years later - I appreciate the compliment, but still think they were only half right.

Understanding the dynamics and patent issues for these IP rich companies is definitely a niche, and though I worked pretty hard to see where the value might be in this complex data for investors, the Nostradamus part was a lot more logic than anything else.

Back in 2011-2012 there was real uncertainty in how these patent wars would play out. When I first looked at the patent data, it was clear that there was real value in the Yahoo patent portfolio as it applied to Facebook. Connecting the dots that Yahoo would sue Facebook as soon as the social network filed to go public, just like Yahoo sued Google when that company IPO'd, seemed like a reasonable extension, which turned out to be correct.

Today Yahoo is still looking to monetize their patent portfolio and some fairly large numbers are being reported as to their valuation. I had the opportunity to briefly walk through this yesterday on CBS Radio's KNX Money Hour with Frank Mottek and Charles Feldman:

There were some connection issues at the end and we cut a bit short, but I wanted to lay out my thinking as to how to realistically value these assets.

At a high level: the Yahoo patent portfolio has vastly different values, depending on the buyer. 

For example, another content company in a similar space to Yahoo, like Twitter or even a news organization, would not see the patents as a major deal driver and likely assign very little value to the portfolio - though the innovations that they protect and have developed at Yahoo could be interesting. Those companies are obviously looking to grow reach, add content, drive impressions, etc. and would value the operating business along those more traditional metrics.

A purely financial buyer like Intellectual Ventures looking to enforce or more strategically license those patents, would assign significantly more value to the patent portfolio than a content company, but would likely offer far less than the $1.1B AOL received in their portfolio transaction. From a pure financial buyers perspective, there are three reasons that these valuations are depressed: the US has made IP much more difficult to enforce - which hurts patent owners and negatively impacts valuations, there is significant transition going on within these specialty IP shops adjusting to the market's "new normal" and so a lot of smart money is on the sideline, and Yahoo may have already licensed much of the portfolio to the most valuable targets, especially Facebook.

The most interesting acquirer could be companies like Comcast, Verizon, Cox, or AT&T, all of whom are starting to compete with new products like Google Fi or Google Fiber. If the Yahoo assets are substantially free from Google encumbrances, then a firm like Verizon could very reasonably assign $1b or more in value because of the applicability of the assets to Google. Verizon especially has been growing their patent portfolio at a rapid rate, and should have significant interest in assets that could meaningfully impact Google with respect to direct licensing, or forcing them to develop alternative technical approaches which could slow their growth. Over the last 5 years, there has been no company better at adjusting both their own IP position as well as the global IP environment to their favor than Google. Since Yahoo likely licensed only a portion of their portfolio to Google, and since those companies are looking for new advantages against what could become an important competitor, this seems like the most obvious fit.

That, to me, this is why companies like Verizon or Comcast would make the most sense. They have divisions which would have significant value for the IP, and divisions which would have real value for the content assets. It would make sense strategically and financially.

There are a number of assumptions in that analysis, but this should help connect the dots a bit. A big part of why I've founded Genaesis was to help companies and investors understand how to make the most of intangible assets in a credible and reasonable way. Hopefully this Yahoo analysis seems a bit more logical and lot less fortune-telling.

Erin-Michael Gill, CEO, Genaesis