Richard Lloyd

Since Yahoo! put its Excalibur patent portfolio up for sale last summer, estimates have varied on how much it might go for. One early report speculated that the patents could generate as much as $4 billion — the kind of price tag not seen since the Rockstar auction, which most people concede was something of a special case.

We now know - thanks to an 8K filed with the SEC yesterday in connection with the sale of Yahoo!’s core business to Verizon - that the internet giant has given the Excalibur assets a fair value of $740 million. That’s a lot more than some of the lower end estimates, but it now begs the question of just who might be willing to part with that kind of cash at a time when the market for sellers remains very challenging, to say the least.

Importantly, this is also at a time when a lot of patent transactions are structured in privateering style deals where relatively little cash changes hands upfront and the seller receives a slice of any profits that the buyer makes from licensing. That may end up being the case here, so just because the Excalibur portfolio has been given a value of $740 million that it is not necessarily how much it will fetch on the open market.

Unless we see a significant upswing such a sum might well be too much for most investors, but if the assets are sold for much less than $740 million or are part of a deal that sees Yahoo! receive a payout once any acquirer starts making money on them, then presumably Yahoo! shareholders will have some questions for the board about why they settled for less than the stated fair value.

Interestingly, the 8K discloses that three bidders among the six that made early, interim bids for the Yahoo! business were willing to buy the patent portfolio as part of any deal. One of those offers was for $5 billion if the deal included the Excalibur portfolio and certain other minority investments and for $4.7 billion if it didn’t. In other words, this unnamed bidder was willing to pay less than $300 million for the patents which Yahoo! clearly saw as well below market value. Verizon, the ultimate winner of the auction, did not acquire Excalibur, but instead received a non-exclusive, royalty-free licence to the portfolio.

So where does Yahoo! go from here? Well, along with its stakes in Yahoo! Japan and Alibaba, Excalibur remains one of the few assets that the company continues to own. The 8K makes clear that the portfolio is still up for sale, but it also holds out the prospect that the business, which is due to be renamed Altbaba, could retain the patents and attempt to monetise them itself: “The Fund also currently intends to seek to sell Excalibur, though the Fund may seek to separately sell certain of the of Excalibur IP assets or to license the Excalibur IP Assets if the Board of Directors of the Fund believes that doing so in the best interests of the Fund’s stockholders.”  

This is a sensible tactic to try to convince potential buyers that the company has plenty of options. Plus it’s worth remembering that one of Altbaba’s board members, Jeffrey Smith of Starboard Capital, has a track record of pushing companies to do more with their patents. In 2012 the activist investor bought into AOL and forced the company to look at actively monetising its portfolio, ultimately leading to a $1 billion patent sale to Microsoft.

Overseeing the Excalibur sale process is Houlihan Lokey which bought the original adviser, Black Stone IP, earlier this year. When that deal was announced Black Stone managing director Edmund Fish told this blog that Houlihan’s network of advisers and investors would be a boon to getting a deal done. That has yet to happen and whether any buyer will be willing to stump up anything even close to $740 million will say much about the state of the deals market.