BlackBerry's (NYSE:BB) patent portfolio should be valued more than the current stock price. The proposed offer from Fairfax Financial for just $9 a share, or $4.7 billion, is just a come-on to start the acquisition process. Though the offer might seem high given the fact that BlackBerry has been languishing for years. But, its patents alone are worth an estimated $2 billion to $3 billion, and smartphone patents are in high demand.
As a result, Fairfax might end up battling a tech giant like Microsoft (NASDAQ:MSFT)(NASDAQ:MSFT)(NASDAQ:MSFT) and be forced to make a higher offer for BlackBerry. While others speculate Fairfax is simply trying to draw in more offers and cash out its 10% BlackBerry stake. If anyone does buy BlackBerry, most of the value would come from the company's patent portfolio. Chris Marlett, CEO of MDB Capital Group, an intellectual property-focused investment bank, values Blackberry's patents at $2 billion to $3 billion.
Only a select few smartphone players, private-equity firms, and other technology companies would pay the billions of dollars that analysts say BlackBerry's IP is worth. After all, those patents include, covering hand-held design features, enterprise email, messaging, encryption, security, touch screens, text prediction, and more.
BlackBerry's 7,500 U.S. patents, granted and pending, are of limited long-term value to private-equity investors such as Fairfax. For those types of businesses, the only logical course would be to flip the portfolio to other players in the smartphone industry for a quick profit.
The way to extract real value from BlackBerry's IP is to use the patents in cross-licensing deals between tech companies, allowing players to use each other's technologies. Patents can also be used in litigation, either on offense to protect turf, or to defend against infringement.
"While the merits of individual patents can be debated, the overall size of the BlackBerry patent portfolio makes it highly attractive," said Alan Fisch, an intellectual property lawyer with Fisch Hoffman Sigler LLP in Washington, D.C.
Intellectual Asset Management, a British trade publication, recently put BlackBerry in an elite group of 14 companies worldwide that hold at least 3,400 U.S. patents, make new applications at a minimum rate, and own the most coveted intellectual property.
What's the rest of BlackBerry worth?
BlackBerry's "hardware, infrastructure, and operating system" could be worth $2 billion. In addition to the hard assets, the company had $2.6 billion in cash on hand at the end of last quarter. But the company blew through $500 million in that three-month period.
I think David Braun, the CEO of IP-focused investment bank Capstone made the best calculation, he set the fair price for BlackBerry at $6 billion.
Who might bid?
A Nortel-style consortium is a likely solution for BlackBerry's patents, even if Fairfax does buy the whole company and sells off the parts. Apple or Google, for example, would have the resources to buy these patents.
A possible bidder for BlackBerry, as a whole, is less clear. One potential buyer is BlackBerry co-founder and former co-CEO Mike Lazaridis, who recently reported an 8% stake. Lazaridis could team up with some private-equity firms to make an offer for the entire company.
A lot of companies may have the money and the market, but who has the vision to make BlackBerry valuable again. BlackBerry is worth something only if a suitor can unlock the value. The strategic buyer route provides an alternative to Fairfax's $9 per share offer, which some speculate has little chance of securing financing. Private-equity firm Cerberus, has also expressed interest.
According to sources, potential corporate buyers have been "especially interested in BlackBerry's secure server network and patent portfolio, although doubts about the assets' value remains an issue." Analysts believe BlackBerry's security-focused messaging system could be worth $3 billion to $4.5 billion, and its patent trove $2 billion to $3 billion. However, a company filing disclosed that the value of its patent portfolio and licensing agreements could have in the next 18 months.
TechCrunch speculates that "An enterprise-focused bidder, such as SAP or Cisco, might make the best fit for BlackBerry's security-focused messaging handset business. Especially since the consumer smartphone market is now primarily centered on Android and iOS."
The latest news is that Chinese technology giant Lenovo (NASDAQOTH:LNVGY) has signed a non-disclosure agreement so that it can examine BlackBerry's books, The Wall Street Journal reported last Thursday, citing an unnamed source. Whether Lenovo will take the next step, and make a bid is unclear.
Lenovo placed a huge and ultimately successful bet when it bought IBM's personal computer business eight years ago. Now Lenovo is ready for a new challenge, acquiring BlackBerry would reshuffle the mobile phone landscape and potentially breathe new life into the BlackBerry brand.
BlackBerry's intellectual property is such a large percentage of the company's value because the actual hardware business isn't worth much. BlackBerry's patents would give any buyer a massive advantage in the competitive and highly litigious world of smartphones.
Johan Seijkens has a position in BlackBerry. The Motley Fool owns shares of Microsoft. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.