Joff Wild

The problem with being an investor who does not know much about patents is that you are reliant on others to give you information about them. When you are approached by credible parties and told that a company whose stock you have invested in is wasting the chance to monetise a $1 billion portfolio, you might sit up and take notice. When you are shown the spreadsheets and the claims charts, and all the other businesses that have made big bucks from their patents are revealed to you, you might contact your company’s board and ask them what the hell is going on. If you do not like the answers, you might formalise things with a letter and even suggest that you would like new blood on the board. Once you have done all this, you might start to get some serious attention.

I don’t know if that is what happened in the case of Starboard Value LP and its discussions with the AOL board, but what I do know is that a month after sending a strongly worded letter to the company’s bosses about their failure to maximise the value of the AOL patent portfolio, Starboard now knows that investment bank Evercore has been appointed to explore ways in which the IP can be made to sweat a whole lot harder. So far so good.

But what happens if the people who have been advising Starboard are wrong? What if the AOL patents are not worth $1 billion, but instead have a value that is substantially less? According to a detailed analysis of AOL’s holdings conducted by IP advisory firm M-Cam this is a distinct possibility. In a report published on Thursday, M-Cam claims that 71% of the portfolio could be impaired and that “potential buyers may want to do some cold, hard diligence as to whether the $1B price expectation announced by Starboard Value can hold water”. The report concludes: “Potential quality issues in the AOL portfolio should have buyers taking a hard look and start “right-sizing” the price to match the goods on offer.” In a Bloomberg news story, M-Cam president David Pratt says that “the absolute ceiling price” for the AOL patents is actually $290 million.

Wait a minute though; further down in the Bloomberg report Erin-Michael Gill, of MDB Capital Group, says that actually M-Cam could be wrong, specific circumstances mean that the AOL portfolio may well be worth a lot more. “There’s a difference between a pure financial value for patents and a strategic value,” he states. “A strategic buyer could bid higher because they realize the long-term value of licensing those patents.” A week earlier, MDB’s co-founder Christopher Marlett had told Bloomberg that the portfolio could well fetch $1 billion and that companies such as Google and Microsoft were potential buyers.

So, for Starboard – and other investors (and company boards for that matter) – the picture is as clear as mud. One credible expert says one thing, another says something completely different. Who to believe? The problem is that there is no answer. There is no objective way to measure patent value. It depends absolutely on context - the number of parties interested in purchasing, their reasons for wanting to, the timings and so on. If you work inside the patent marketplace, this is something you know. But if you don’t, and all you have read is the headlines about big sales and big licensing revenues, then you may not instinctively realise this; and that there are such things as impairments and encumbrances, or that most patents are not actually worth a penny. But it matters you do know - a lot. If, like Starboard, you are making strategic decisions about a company based on its patents, you need to have a close understanding of what they are all about. You can’t rely on others to tell you. There is, after all, a very big difference between $290 million and $1 billion. And it’s Starboard's money and reputation that is on the line.