InterDigital Communications(Nasdaq: IDCC) saw its market capitalization surge more than $300 million, or 38%, in early trading today after the company announced it settled a patent and royalty dispute with Ericsson(Nasdaq: ERICY).
Ericsson will pay $34 million to cover its sales through the end of 2002 -- a tremendous boost for InterDigital, which had revenues just above $27 million in the last quarter. In addition, Ericsson will pay a $6 million annual license fee to InterDigital, plus a royalty on each product sold through 2006.
InterDigital claims patents on several key components in GSM, a leading, high-speed mobile communications standard, and has been fighting for years to have its patents recognized and royalties paid. Some pundits were dismissive of InterDigital's claims in years past, saying it was seeking to get onto the same gravy train that took Qualcomm(Nasdaq: QCOM) into the stratosphere in 1999. After the endless delays of 3G Communications, InterDigital slid back down into obscurity, out of the public's view.
By January 2001, InterDigital traded as low as $4, which means that even prior to the most recent agreement, the stock had more than tripled -- and in a miserable market, especially for telecommunications equipment companies.
On the other hand, unless an investor has some deep knowledge about the merits of a case, counting on a legal judgment as a key component to an investing thesis isn't recommended. Even if the case seems cut and dry, the law works in strange ways.
After news of the agreement, Ericsson's stock surged as well -- up in early trading by as much as 17%. How can this be? This suit was scheduled to go to trial in May, and the potential losses for Ericsson due to a bad outcome were as high as billions. This agreement makes it unlikely that other holdouts, including Nokia(NYSE: NOK) and Samsung, would succeed in avoiding making royalty payments to InterDigital. Nokia's royalties from 2002 alone could be worth $120 million.
So, the $34 million paid with this agreement could spiral much higher. These are royalty payments, which have no cost of goods associated with them. As a result, they are almost pure profit to InterDigital. For a small company, getting more than its last quarter's revenues in a lump-sum settlement, if nothing else, makes for a great day.