Will Apple Buy Nokia's Patents, at Least?

Mobile phone veteran Nokia (NYSE: NOK  ) needs a lifeline. Apple (Nasdaq: AAPL  ) could use some of what the Finnish company has to offer, and has money to burn. It seems obvious, right? These two should just get a room and start planning a wedding.

Well, maybe not. Fellow Fool Eric Bleeker already presented several reasons why Cupertino might not be interested in buying Nokia, even at today's low, low prices:

  • Apple put too much blood, sweat, and tears into its new Maps app to be seriously interested in Nokia's Navteq mapping tools.
  • Steve Jobs was never into huge mergers, and Tim Cook seems no different. Apple's largest buyouts ever hovered around $400 million, including the storied NeXT deal that brought Jobs back and last year's Anobit Technologies buyout. Nokia's enterprise value is a hefty $4.1 billion today, before adding any kind of buyout premium. That's just not how Apple rolls.
  • Finally, Eric argues that Apple might want some of Nokia's mobile technology patents, but that a stand-alone patent buy would make more sense than buying the whole company.

I'm here to dig deeper into the patent question. You see, Apple does have a history of spending big money on patent assets.

When Canadian telecom equipment maker Nortel went bankrupt, Apple was the largest stakeholder in the consortium that spent $4.5 billion on Nortel's patents. Apple's check to Nortel's debt holders works out to $2.6 billion.

So Apple bidding for a foreign patent portfolio is not out of the question.

Nokia's patents could also turn out useful in Apple's legal battles against the Android army. Specifically, they would give Apple some 3G and 4G technology mud to sling back at Samsung, which likes to assert its own 3G standards-essential patents against Cupertino. As a reminder, most of Apple's offense so far has been based on "look and feel" design patents, while countersuits mostly center on the patented technologies that make a tablet or cell phone tick.

Where's the beef?
So far, so sensible. By picking up Nokia's patent portfolio and leaving the rest behind, Apple would get a high-quality weapon at a discount. And nobody would ask Tim Cook to sell low-end "feature phones" or maintain telecom infrastructures under the Nokia Siemens umbrella.

But those patents would not be cheap. Let's focus on the 4G LTE portion of Nokia's patent holdings. According to data from independent research firm iRunway, the Finns own about 290 patents related to the current state of the art in high-speed data networks, or 2.3% of the total 4G patent space. iRunway classified 27 of these as "seminal" patents, meaning that they may or may not be declared essential to 4G standards, but it would be very hard to make a proper 4G device without infringing on these patents.

By contrast, consider the case of VirnetX (NYSEMKT: VHC  ) . The company sports a $1.2 enterprise value based on about 45 wireless technology patents. Some of these have been declared essential to 4G standards, though the iRunway study didn't find any of them to be "seminal." You could argue that Nokia's patents are more important than VirnetX's, and I'm sure some will flip that argument around, but let's just call them even for this value exercise.

In other words, the open market's price tag on VirnetX is about 30% of the entire Nokia bundle. Yet, even if we assume that the rest of Nokia is totally worthless, the Finns sit on about six times the 4G assets that VirnetX boasts. Either Nokia's patents are worth far more than the company's current market value, or VirnetX is ridiculously overvalued -- or maybe both. In my opinion, technology patents are overvalued in general right now. But the market gets final say, and either way, I don't see Apple coughing up several billion dollars for another dip in the wireless patents fount.

One more thing
So I think that a patent deal between Apple and Nokia is unlikely. An outright buyout would be a total shock. Add up all the reasons described above, and then consider the fact that an ex-
Microsoft (Nasdaq: MSFT  ) executive runs Nokia these days. Can you imagine the culture clash that would erupt if Apple took over the reins? Redmond and Cupertino are polar opposites in many ways, and Nokia CEO Stephen Elop must have brought some of Microsoft's values to Finland.

Going back to Elop's hiring, I always thought that Microsoft was grooming Nokia as a takeover target. Apple might start a bidding war, but more to drive up Microsoft's final buyout price than to actually get anything for itself. I still stand by that theory.

In the end, I don't see Apple grabbing any part of Nokia. The idea doesn't fit with Apple's money management history, and Microsoft looks like a far more likely final destination.

Fool contributor Anders Bylund holds no position in any of the companies mentioned. Check out Anders' bio and holdings, or follow him on Twitter and Google+. The Motley Fool owns shares of Microsoft and Apple. Motley Fool newsletter services have recommended buying shares of Apple. Motley Fool newsletter services have also recommended creating a bull call spread position in Apple and a synthetic covered call position in Microsoft. The Motley Fool has a strict disclosure policy.

We Fools may not all hold the same opinion, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletters free for 30 days.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 10, 2012, at 7:17 PM, 2001Cobra wrote:

    Not even 1 mention about IDCC? This would be a smarter And cheaper purchase than Nokia...Plus, they would get nearly $1B in cash on hand, and an arsenal of 3G/4G patents and gain thousands of engineers to boot....

  • Report this Comment On October 10, 2012, at 8:00 PM, taishiba wrote:

    VRNG - Vringo is a more likely buyout candidate for Apple. Cheap with best IP lawyers in USA and biggest wins under their belt previously.

    VRNG owns rights to over 500 NOK patents as well.

  • Report this Comment On October 11, 2012, at 5:36 AM, TMFZahrim wrote:

    The point of this article was not to pinpoint Apple's next buyout target, but to explore what might happen to Nokia. Thanks for the story ideas, though.


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