InterDigital confirmed last night that it was buying Technicolor’s licensing business in a transaction valued at $475 million. Once completed the deal will draw a line under the French company’s licensing operation which has long been one of the most prominent in the IP value creation market.
According to the terms of the deal, InterDigital is paying $150 million upfront while Technicolor will also receive 42.5% of all future cash receipts from InterDigital’s new licensing efforts in the consumer electronics field. Here’s how a release broke down the other parts of the deal:
- InterDigital will acquire Technicolor’s portfolio of more than 21,000 patents and applications across a broad range of technologies including over 2,500 worldwide video coding patents, which will complement InterDigital’s existing portfolio of approximately 19,000 patent assets in wireless, video and other technologies.
- InterDigital will deploy the acquired assets into its existing mobile industry licensing efforts, and extend its licensing program to new activities in the consumer electronics field.
- InterDigital will assume Technicolor’s role as the exclusive licensing agent for the joint licensing program with Sony related to display technology.
- Technicolor’s global team of licensing experts, patent managers and support staff will join InterDigital and work with its existing licensing team to license the expanded patent portfolio.
- As part of this transaction, InterDigital will also grant back to Technicolor a perpetual license for patents acquired in the transaction.
While the full value of the deal represents a decent return for Technicolor in the current climate the total is some way off what it might have been expected to receive a few years ago and the markets were clearly not impressed as the French company’s stock dropped throughout the course of today by more than 20%.
Technicolor announced last December that it was in advanced talks to sell its patent licensing function, opting to focus its efforts on its operating business. That came as the company faced strengthening headwinds in 2017 which saw revenue for the year drop by 6.8% and earnings by a little over 17%.
The Patent Investor reported earlier this year that a deal between the French tech company and InterDigital was imminent which was also what our sources were telling us. It’s not clear how many rival bidders there were although IAM understands that at least one well-known NPE was actively considering making an offer.
Technicolor’s patent business has gone through a period of significant change in recent years. Under IP Hall of Fame member Beatrix de Russe, it emerged as one of the leading licensing operations of any European business, generating hundreds of millions of dollars annually. In 2013, in a move that heralded a series of changes at the top, de Russe was replaced by former Apple IP executive and current Conversant CEO Boris Teksler, who then jumped to Unwired Planet in 2015 (at Technicolor he ran the technology group which included IP and licensing).
He was eventually replaced by Arvin Patel who, after a little less than two years in France, joined TiVo as its IP chief. Former IP Nav executive Deirdre Leane then replaced Patel and it’s not yet clear what her next move will be.
Questions have been raised before over Technicolor’s prospects as a combined business. A few years ago it came under pressure from Vector Capital, its largest shareholder at the time, to spin off its operating business so that it could focus on the IP arm. That standoff escalated significantly in late 2014 and early 2015 as the pair filed competing lawsuits against each other.
That spat ultimately ended in a settlement and now, by selling off the IP operation and retaining its product business, the company has opted to do the complete opposite of what Vector proposed.
From the handful of investors and interested observers that I spoke to this morning about the terms of the deal it’s fair to say that the response was mixed. “I feel that the price is not bad for the portfolio — the market had clearly overvalued the licensing business,” said one.
All were uncertain at just how the back-end of the deal might work out, such as how long it would take for Technicolor to see a full return from its 42.5% stake in InterDigital’s new licensing activities. Plus, with the French company giving up most of its IP and therefore its leverage in agreeing cross-licensing deals with competitors, new inbound licensing agreements could become a significant cost for the business.
For InterDigital the acquisition is the latest significant deal for the business following the acquisition of sensor business Hillcrest Labs. As CEO Bill Merritt told IAM last year, the company has been keenly aware of the benefits of size in the licensing business. In light of the Technicolor announcement it’s worth looking back on what Merritt told us:
I think the last few years have demonstrated to us that there is huge value to scale in this business. A few years ago there was this fork in the road where we had a lot of companies with portfolios of a greatly different size all carrying reasonably sized valuations. And what has happened is that the ones with the small portfolios have fallen off the map and the ones with the larger portfolios are doing well.
When asked if InterDigital itself might become a target Merritt responded:
If someone put the right number up there, sure, we’d be a seller — that’s my obligation to the current shareholders. But are we intending to be a buyer? Yes, because I think we can leverage our customer base, we can maintain our model and we can go back to the decision we made in 2009 [to focus on R&D and licensing]. This market is not going anywhere other than growing, particularly as IoT becomes a new growth driver. We’ll just do it in a bigger way.
Considering that the Technicolor purchase more than doubles InterDigital’s patent portfolio, it’s going to be doing it in a much bigger way.