Google is in a very tight spot right now. Being a relatively young company, compared to Microsoft, Apple, IBM etc, it doesn’t have many patents to its name. It has surely been innovating a lot, and has been building its patent portfolio in the past decade, but it is still nowhere compared to Microsoft or Apple, with less than 1000 patents in its portfolio. Its plan to acquire Nortel’s patent portfolio, which had over 6000 patents, failed when it lost a bidding war against a consortium of its greatest rivals – Microsoft, Apple, RIM and some others.
In the meantime, almost every company (well not every company, just Apple, Microsoft and Oracle so far) is bullying Google and its partners which make Android devices over patent infringement related to Android. To put an end to all the bullying and litigation, Google needs to bulk up its patent portfolio, and the only way to do it fast is by acquiring a company which has a huge one, related to telecommunication. Once Google acquires a decent number of patents, it won’t remain vulnerable and can easily defend itself and its partners against patent infringement lawsuits from the likes of Apple, Microsoft and Oracle.
Google obviously knows this, which is why they bid billions of dollars for the Nortel patents in the first place, but it’s hard to win an auction when you are up against heavyweights like Apple and Microsoft, who have billions of dollars in cash waiting to be used.
According to a report by WSJ, it seems like Google has another acquisition target in its sights – InterDigital. InterDigital has almost 8,800 patents related to wireless technology, and is possibly the best option for Google right now. Apple knows this, and with $76.2 billion in cash, it will likely try to acquire InterDigital as well. Ever since word of a possible acquisition got out, InterDigital’s stock has jumped up almost 65% in 3 days. Its market cap is now $3.3 billion, which is still way lower than the $4.5 billion Apple and Microsoft paid for the Nortel portfolio.
InterDigital’s management team knows this very well, and will try to auction itself to the highest bidder. Google is running out of options, and Apple has nearly double the cash that Google does. So, none of them are going to back off easily.
If I had to pick one stock to invest in, right now, it would definitely be InterDigital. It’s priced quite high right now, but I expect to rise even more, however irrational it may seem. Currently, patents are worth their weight in gold, and with Apple and Google’s billions in the game, the prices are very likely to be bid up. Winner’s curse, Auction theory 101.
Disclosure: I have no open positions in any of the companies mentioned in the post.