Monday, 9 December 2013

Rockstar and IP Governance

John veschiOver at the IP Summit in Paris, John Veschi - CEO of Rockstar - has provided a couple of fascinating insights in how IP is governed and should be included on balance sheets. One of John's thesis is that if Nortel had put the value of IP onto its balance sheet, then the company might not have been placed into bankruptcy. Rockstar - on the other hand - was able to value the IP at USD 4.5 billion because of the arm's length transaction in the form of the purchase by the Applie / Microsoft consortium. Clearly there is / was a mismatch between these two values. Rockstar Nortel Logo Currently it's considered to be too hard to place any value for IP normally onto a balance sheet. Historic costs - including preparation and prosecution costs - is clearly inaccurate because the value of IP changes over time. The difficulty on ascertaining value means that litigation concerns often result in a value of zero being placed on the balance sheet. To date there have been no shareholder suits arguing that the IP should be valued higher. Share analysts fail to understand the value of IP, as this author can confirm having been consulted many times on this subject. John drew an analogy with share options. Their value was originally not included on balance sheets. Today the Black-Scholes method enables at least a rough calculation to be made. The value of IP will also be an inaccurate calculation, because of unknown variable. Black Scholes John concluded that an IP rich company needs a different governance strategy in order to exploit its value. Few CEOs have any IP background and it's not surprising that they tend to be dismissive of IP, particularly when faced with an allegation of infringement. The discussion afterwards also illustrated different opinions. One speaker highlighted the risk of invalidation of IP risks. John pointed out that this risk can be built into calculations.


Chuck Till said...

If Nortel had been willing to sell the patent portfolio prior to 2009 as a way of raising cash, I'm sure he is correct. One could say the same, of course, about Nortel's divesting any of its assets or businesses prior to meltdown.

It's less clear, however, whether
Nortel's short-term lenders would ever have had so much faith in a ten-figure valuation of the portfolio that they would have been willing to extend Nortel further credit on that basis alone -- or to have taken the portfolio into consideration when evaluating pass/fail against the covenants on existing loans to Nortel.

Rob Harrison said...

Chuck - you are right. And I think John would agree with you. It was only when Motorola's stalking horse bid came out at USD 900 Mio that the investors really began to take the IP asset value seriously.

IP Specialities said...

You state:

"Clearly there is / was a mismatch between these two values."

From an accounting point of view this is not correct. Where a valid market value can be assigned, e.g. due to a purchase or sale, GAAP allows this value to be used in accounting. As you point out correctly t: "Currently it's considered to be too hard to place any value for IP normally onto a balance sheet."

However the reference to Black-Scholes is not helpful. Black-Scholes works where the value can be described as a Gaussian distribution about a mean value. This is not a bad assumption for a share price but it does not work for patent value. Patent value follows something like a log-normal curve at best and that results in no analytic solution. One could do it with finite difference methods, perhaps.

Also Black-Scholes can be seen as one of the major reasons behind the recent financial crisis as it rates volatile stock highly. In other words it drives investors towards risky investments and if everybody goes for the same risky investments the whole system collapses if the risk does not pay off.

Just as with derivatives there is a danger because to do this properly you need to understand

a) patent law
b) accounting
c) how the mathematics works and what risks are hidden in the analysis and assumptions used.

Allen Greenspan got it wrong when only dealing with the last two of these.


William Bird

Alan Harrison said...

A patent not asserted or licensed has zero value beyond that already accounted for the business the patent protects.

In theory it might be possible to break out from existing line items, how much would be at risk of competition if not for the deterrent effect of a patent. However, the exercise in practice would be expensive, merely speculative, and in the end would produce no actionable data.

On the other hand, each patent does have a basis (cost of obtaining the patent), which can be depreciated.