Nortel's deft sleight of hand

As the Ericsson / Nortel / Research In Motion saga continued yesterday, one new bit of relevant information emerged from the Bankruptcy Court hearing. It telegraphed a couple of points: first that Nortel anticipated some public fallout might arise from the sale of its crown LTE jewel to a foreign bidder, and second, that they had a trick up their sleeve to deal with whatever Industry Canada review would come to pass.

This from the Globe’s coverage:

During the court hearing, Nortel’s Toronto lawyer Derrick Tay said RIM’s lawyers never showed up to object throughout the 22-day sale process for Nortel’s wireless assets, and that its criticisms of the process were based on “misinformation and untruths.”

The lawyer rejected allegations by RIM co-chief executive officer Jim Balsillie that his company had been blocked from bidding by Nortel officials.

“No one was unfairly barred or refused,” he told the court, adding that RIM tried to “interfere by going to the media and politicians.”

Mr. Tay added that Nortel has 5,500 patents and that the wireless deal involves 125 patents.

Nortel will also continue to own the patents relating to its Long Term Evolution project, which involves developing a new high speed wireless system. Ericsson will licence the patents, he added.

The idea that “only” 125 of Nortel’s 5,500 patents are on the table in the Ericsson deal is a bit ludicrous. If each batch of 125 patents are worth US$1.13 billion, then Nortel’s liabilities wouldn’t exceed its assets…and therefore it wouldn’t be bankrupt today.

If we’ve all read the tea leaves correctly, these patents are probably Nortel’s most valuable. The balance of the 5,500 patents are worth what the market will pay for them, and to date it doesn’t sound like a number that will even come close to taking care of Nortel’s secured creditors, let alone the unfortunate pensioners.

The more devilish point is the one about Nortel licencing, but not selling, these patents to Ericsson. This is nothing more than a transparent attempt to convince the Industry Minister that he can approve the sale in good conscience: “Minister, the assets are remaining under Canadian ownership!” will be the refrain.

As every lender and venture capital investor knows, there are two ways to sell a tech company: you either sell the asset or you licence the unfettered worldwide rights to the intellectual property. Often, buyers might prefer the licence angle if they are trying to avoid legacy liabilities, for example, or government barriers.

None of us know what the details of the proposed Ericsson LTE licence agreement are, so I don’t want to speculate about the terms and conditions. Perhaps Nortel has retained the right to licence the LTE intellectual property to RIM, for example, or anyone who lost out in the Court-supervised bidding process. But I strongly doubt that Ericsson paid US$1.13 billion for a licence to 125 patents that Nortel can then re-sell to a competitor over the next few years.

The patent licence is just another form of a sale transaction.

As arguments go, it’s worth a shot. But Industry Minister Tony Clement should see through this “we didn’t sell the IP, it’s just a licence” charade. If there’s a “net benefit” to Canada, the Minister will sleep well at night; if not, the deal doesn’t pass muster.

MRM
(disclosure – I own RIM)