A group including Apple, Research In Motion and Microsoft will pay $4.5 billion to snatch Nortel Networks' patents from under the noses of Google and Intel, stealing a march on their rivals in a litigious market.
The price was about three times the expected amount, underlining the defensive value of intellectual property in the fast-changing world of telecommunications, where established players are seeking to keep out newer rivals.
Bankrupt Nortel had put up for sale 6,000 patents and patent applications in the largest public sale of its kind, a potential treasure trove for latecomers to the market such as Apple, Google and Intel.
The winning group -- which also includes EMC, Ericsson and Sony -- is expected to share the patents to maximize their ability to pursue intellectual property litigation, though they did not disclose details.
Google, the newest major entrant to the mobile market with its three-year-old Android software platform, has a weak patent portfolio compared with its rivals and is now more vulnerable to lawsuits from the auction winners.
The wireless industry has experienced a wave of legal patent battles in recent years as long-established incumbents try to protect their position against newcomers.
The search engine market leader was expected to be a winner in the auction after it opened the bidding in April with a $900 million stalking-horse bid. It called the outcome of the auction disappointing and said it would keep working to reduce the current flood of patent litigation.
BIG LOSS FOR GOOGLE
Google did not explain how it came to lose the auction, but at least one analyst puzzled over why the cash-rich company could not prevail. It may raise questions among investors as to how effective Google co-founder Larry Page is as chief executive, BGC Partners Colin Gillis said.
Google shares were up 1.6 percent on Friday as investors shrugged off the auction loss, but Gillis warned it could hurt them further down the line if Google has to start paying billions of dollars in licensing fees.
They played a bad hand. They went from stalking horse to not being involved ... I'm very curious how that happened , Gillis said. Google had a chance to change a weakness and it didn't.
You may find it becomes a serious issue, he said. We wont see the real impact of this for a couple of years.
One key advantage to holding patents is the ability to swap licenses with other holders of key mobile phone patents, instead of having to pay cash.
Microsoft, which declined to comment on the purchase, bid for the licenses even though it had already said it has a perpetual, royalty-free license for all of Nortel patents.
The potential for cross-licensing agreements was likely the reason Microsoft wanted to own rather than license, according to Gillis, who noted that Google would now be in a much weaker position in this respect.
Germany-based intellectual property analyst and blogger Florian Mueller said Google missed the chance to buy a major bargaining chip to strengthen its hand in IP negotiations.
Nobody in the industry will be likely to get such a big patent acquisition opportunity again, experts said.
If you picture in the art world, if the collection of the Musee D'Orsay all of sudden came onto the market -- those are paintings you would never see again of a breadth and of a certain caliber, said Duncan Stewart, Deloitte Canada's director of research for technology, media and telecommunications.
Some people in the industry saw the purchase by a group rather than a single player as better news for the sector overall, since no one company would have a monopoly.
Swedish telecoms equipment maker Ericsson said in a statement: We believe the consortium is in the best position to utilise the patents in a manner that will be favourable to the industry long term.
BlackBerry maker Research in Motion will pay $770 million of the purchase amount, and Ericsson will pay $340 million. The other parties did not immediately say what their share would be.
The patent sale fetched a bigger price than all of Nortel's other asset sales combined. Lazard advised Nortel in the deal while Jefferies & Co advised the company's creditors. Akin Gump was legal adviser to Nortel's creditors while Cleary Gottlieb advised the company.
Nortel, which filed for bankruptcy protection more than two years ago after struggling for years after the tech bubble burst in a cut-throat telecoms equipment market, has now raised almost $8 billion from asset sales.
The size and dollar value for this transaction is unprecedented, as was the significant interest in the portfolio among major companies around the world, said Nortel's chief strategy officer, George Riedel.
Richard Windsor, global technology specialist at Nomura Securities, called the price chunky and said the consortium would likely go out and seek to make a return by prosecuting the other people, particularly the Android camp.
The latest sale spans wireless, wireless 4G, data networking, optical, voice, Internet and semiconductor technologies. The most prized relate to emerging 4G standards such as long-term evolution (LTE).
Toronto-based Nortel reiterated that it did not expect shareholders to receive any value from the sale, part of its creditor protection proceedings, and said it expected equity interests to be canceled as a result of the proceedings.
The sale is subject to Canadian and U.S. court approvals that will be sought at a joint hearing expected to be held on July 11, Nortel said. Earlier on Thursday, Nortel obtained a court order to further extend the stay of proceedings under the Companies' Creditors Arrangement Act (CCAA) to December 14.
The bankruptcy case is Nortel Networks Inc., 09-10138, U.S. Bankruptcy Court, District of Delaware (Wilmington).
(Additional reporting by Alastair Sharp in Toronto, Tarmo Virki in Tallinn, Sinead Carew and Nadia Damouni in New York, and Bill Rigby in Seattle; Editing by Anshuman Daga and Will Waterman)