Joff Wild

Yesterday the Kodak share price went through the floor on the news that the company had unexpectedly drawn down $160 million worth of credit. The stock closed at a 37-year low, with the company valued at less than $500 million. For those of us who do not work in the world of finance, that is a puzzling amount given that there is talk that the portfolio of patents the company is offering for sale could fetch up to $3 billion. In the past, the gap between relatively low net book values and relatively high market capitalisations has been explained away by the ownership of IP and other intangibles. It may not be the soundest of theories, but it can only work at all if the net book value is lower than the market cap; in Kodak’s case it looks like the opposite may apply.

I use the word “may” advisedly. While talk of a $3 billion patent portfolio generates headlines and could attract interest from potential buyers wanting to know what all the fuss is about, that does not actually mean that such a price is realistic. On this blog, Art Monk of UBM TechInsights has already questioned the value of what is on offer. At the end of comments on Google’s Motorola Mobility purchase he stated: “Next up appears to be Kodak … but they aren’t anywhere on the ETSI [European Telecommunications Standards Institute] list so don’t expect high valuations in the wireless space.” Now IP consultants M-CAM (whose chairman David Martin catchily described the patents involved in Google’s Motorola acquisition as “crap”) have released the results of research that, they claim, raises significant doubts as to that $3 billion valuation figure.

In Kodak: Is a picture really worth $3 billion?, M-CAM puts the Kodak portfolio under the microscope to assess “the strength and transferability of each patent”. The conclusion is that 31% of what is on offer is impaired in some way. “This should be taken as a potential red flag in the market for these properties. Prospective buyers need to have much greater clarity into the quality and enforceability of the portfolio before settling on a final transaction price,” the report states. After looking at the patents that Kodak is currently enforcing against Apple and concluding that these may be problematical too, the report ends by stating:

… significant quality considerations have been identified in Kodak’s digital imaging patent portfolio. Any prospective bidder or financier would need to secure far greater specificity and clarity around the commercial options derived from the portfolio prior to estimating appropriate value and its associated cost of enforcement. The common bidding price being circulated for Kodak’s digital imaging patents is currently $3 billion for over 1,000 patents, 31% of which have impairment issues. The cost of procuring patents of dubious quality will be an ongoing and potentially unnecessary liability to any bidding company and its shareholders. In addition, the patents that Kodak is asserting against Apple and others – to generate cash flow – were all found to have substantial weaknesses. Recent patent acquisition activity in the tech sector by Google and others have resulted in multi billion dollar transactions that have lacked clarity as to patent quality and enforceability. To potential bidders for Kodak’s digital imaging portfolio, we repeat – “Caveat Emptor.”

Now, I do not know whether M-CAM has called this correctly, but what I do know is that if potential buyers of the portfolio end up agreeing, the price they are willing to pay is unlikely to be close to $3 billion. Should that turn out to be the case, then I dread to think what will happen to Kodak stock, with all the implications that will have for the future of the company.