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Patent sale marks end of line for once-mighty Nortel

Nortel sign.

Mark Blinch /Reuters

The 116-year story of Nortel Networks Corp. is finally coming to an end, after the once-dominant telecommunications firm completed the biggest sale of technology patents in history - and in the process significantly altered the wireless industry for years to come.

A consortium of six companies led by Apple Inc. and Research In Motion Ltd. purchased about 6,000 Nortel patents - the bankrupt company's last significant asset - for $4.5-billion (U.S.). Nortel sold the patents over the course of a four-day auction that began Monday and prompted a fierce bidding war among the biggest names in technology, as is evident by the final price tag, which was more than twice as much as any analyst had previously predicted.

The sprawling Nortel portfolio contains patents relating to everything from wireless technology to fibre-optics, Internet search and social networking. It also includes patents related to Long Term Evolution, the hugely important technological standard for existing and future smart phone networks.

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"There are a lot of gems in this portfolio," said Alexander Poltorak, chairman and CEO of General Patent Corp. "The sheer number of patents creates a sort of a critical mass that raises exponentially the value of the portfolio as a whole."

Nortel entered bankruptcy protection in January, 2009, and five months later announced that rather than try to restructure, it would liquidate to raise money to pay creditors. Up to this point, its asset sales have brought in more than $3-billion. Initially, few observers expected Nortel's patents to fetch much more than $2-billion.

The selling price illustrates the rising importance that large technology companies are placing on intellectual property. In recent years, patent litigation has proven extremely costly for companies such as RIM and Google, and the Nortel patents were seen as both a means of protection and a way of counter-attacking. In many technology patent cases, the parties tend to file countersuits, and often end up settling by cross-licensing patents to one another.

"Companies are looking differently at [intellectual property]rights because they see it as something that's both offensive and defensive," said Ronald Gruia, an analyst at Frost & Sullivan who previously worked at and filed patents through Nortel. "It's a strategic asset."

With the patent sale complete, the creditors and other parties involved in the Nortel bankruptcy proceedings will go back to the mediation table to figure out how to split up the funds from this and previous auctions, which now total more than $7-billion. However, the high price tag of the patent portfolio will likely prompt the parties to speed up negotiations, said David Descoteaux, managing director at Lazard, which acts as Nortel's investment bank.

He added that, even though it was clear from the start the final selling price would be significantly higher than Google's $900-million opening bid, "the price that we were able to achieve was higher than any of us would have expected."

The proceeds from selling off Nortel in pieces should be enough to cover bondholder claims, suggested Geof Marshall, a portfolio manager at Signature Global Advisors, which owns Nortel bonds. "Generally, each of the auctions over the past 18 months went better than expected. [But]it was the IP auction that really moved the needle."

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The patent auction took place over four nearly non-stop days in the midtown Manhattan conference centre of law firm Cleary Gottlieb. The rules of the auction required the players to be present in person, and about 150 people attended, representing various bidders and bankruptcy-related groups. The participants were required to sign confidentiality forms.

A person familiar with the proceedings said the auction was fierce and included various strategic re-alignments on the parts of the bidding companies.

According to the person, Intel Corp. followed Google's opening bid with its own $1.05-billion offer. Nortel quickly altered the rules so that each new bid had to be at least $100-million more than the last. Bidders that dropped out at any point in the auction were not allowed to return. There were other consortiums bidding on the patents, including a group of 20 companies represented by California-based patent firm RPX Corp.

Much of the bidding war involved Google and Apple, the person said, adding that around the $2-billion mark, Apple decided to cast its lot with the consortium that eventually made the winning bid. Besides RIM and Apple, the winning consortium included EMC Corp., Telefon AB LM Ericsson, Microsoft Corp. and Sony Corp.

Not all six members of the winning consortium have disclosed their share of the $4.5-billion price tag. RIM is likely interested in the wireless networking and LTE patents in the portfolio and said it will pay $770-million for its share of the patents. Indeed, RIM's involvement in the bid marks the only Canadian connection that will remain to what was once Nortel's vast business empire.

"RIM was smart to partner with several other companies because even though few people would have predicted a final purchase price of this amount, it was kind of foreseeable that the price would be driven up by some bidders' desire to keep the patents out of the hands of other bidders," said Florian Mueller, an intellectual property analyst.

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Perhaps the biggest loser in the auction was Google, which Mr. Mueller noted is involved in about 45 different patent lawsuits related to its Android operating system for mobile devices. Unlike many of the other players in the wireless world, Google's own stable of patents is small, and the company has only recently sought to better protect itself from patent litigation.

The key question for Google and the rest of the wireless technology industry now is what the winning consortium will do with the patent portfolio. The companies may choose to set up a licensing scheme as a way to make money from the intellectual property, said Forrester analyst Henry Dewing, or they may release the technology in whole or in part.

"The key thing here is that [the portfolio]is in the hands of a consortium that can move the industry faster," Mr. Dewing said.

"What I'm hoping is that all the value Nortel research and legal teams spent building into this portfolio is now going to bear fruit for somebody."

With files from reporter Boyd Erman

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