Thursday 28 March 2013

The Fight Over Dell: Just How Hidden Is Its IP?

It was just a matter of time. Many of you might be following the recent events surrounding Michael Dell's efforts to lead a consortium to take the eponymous company private, and the two counter-offers submitted this week by investment heavyweights Carl Icahn and the Blackstone group. The underlying motivation for these investments seems to be the sense that only by taking the company private does it have a fighting chance to blunt its decline in the computer world, as the PC continues to give way to other computer hardware devices in the marketplace, while Dell has not come up with any substantial product alternatives.

So what "was just a matter of time"? No, I don't mean the high stakes competition for control of the company. I leave that for the myriad of experts in the M&A world who are way beyond my pay grade. Rather, I mean the attempt to turn IP into a potentially central aspect of the investment interest in the company. Consider the piece that appeared on the March 25th edition of Businessweek Technology Insider. Written by Roben Farzad, a well-regarded writer for the publication, the title says it all—"The Hidden Value of Dell: 3,449 Patents and Other Intellectual Property", here.

In effect, Farzad is summarizing a report that appears to have been published on March 8th by M*CAM, which is described as an IP valuation company located in the postcard-pretty town of Charlottesville, Virginia, here. According to the report, Dell has 3,449 patents and 1,660 patent applications. The report purports to have applied data-mining algorithms that give a commercial fitness measure as well as a measure of the transferability of each patent. The result: "47% of Dell's IP portfolio scored as commercial." The report ascribed a commercial fitness score of greater 50% in four out of 17 technical categories, namely graphics processing, data transfer, networks and switches." Using Farzad's term, the Dell transaction is merely the latest example of "IP wildcatting", following on the heals of the sale of AOL patents, the auctioning of the Nortel patents, the reported interest of Alcatel-Lucent to use Bell Labs IP as collateral and the Kodak patent portfolio

Let me be honest: I am skeptical about this. Consider the statement that "a source close to the deal says its bankers are cognizant of Dell's patent value." I seem to recall that it was the bankers who were flogging the $2.5 billion valuation of the Kodak portfolio in late 2011, only to see it later sold for barely $500 million. Sorry, I don't hold much credence in the bankers with respect to patent valuations. And then there is interest of the IP valuation company. Without suggesting anything untoward in the way that M*CAM has evaluated the IP position of Dell, either in its algorithms, heuristics, or conclusions, it should still be recalled that, since the Kodak valuation debacle, the industry has had a bit of explaining to do.

To be fair, the president of M*CAM states that "[t]he asset class [IP] is often misunderstood and difficult to price." That said, the report asks: "Does Dell truly not know it has strong it has market controls in its new business segments?" Does Dell not see that it could license its network technology to a third party, even a rival, thus generating a payment stream without really affecting its core business segments? Do most investors not really know, as suggested in the report, that IP can generate money for a company? Even a generation after we were told by Kevin Rivette and David Kline about the potential of exploiting IP Rembrandts in the attic, here, can it really be that Dell is still so very clueless about its IP position? Or are there other interests equally at work at playing up the company's IP potential? At the end of the day, is IP really the hidden story of the Dell transaction?

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