Last month Microsoft (NASDAQ MSFT) reported its first quarterly loss as a public company (7/19/2012). As losses go it wasn’t much- US $492 Million for the quarter ending June 30, 2012. Of late Microsoft has been earning US $ 6 Billion per quarter. And with more than US $60 Billion in cash, MSFT isn’t going broke any time soon. What’s interesting about this story is that Microsoft wrote off more than US $6 billion in intangible assets. And if you’re any company other than Microsoft, there are some interesting opportunities to use those losses to showcase other intellectual properties you own. You might even be able to recover all of your losses.
In 2007 Microsoft bought a digital ad agency called aQuantive. Back then, companies like aQuantive were perceived as the digital evolution of Internet advertising. Microsoft wasn’t alone- Google, Yahoo and others seeking new revenue models for the Web were also in the hunt for acquisitions. Mergers and acquisitions (M&A) is what big successful companies do when their original business models mature and cease to grow. But there’s a problem with acquisitions- they fail to achieve results more often than they succeed. Don’t take my word for it-McKinsey & Company, a premier global management consulting firm, has been researching M&A activity for years. They empirically observed that 70% of acquisitions fail to meet their revenue targets. And more than a third under estimate the full cost of making the acquisition. (See “New McKinsey research challenges conventional M&A wisdom”, Strategy & Leadership, Vol. 32 Issue 2, pp.4 – 11.) In other words, the odds of success were never in Microsoft’s favor.
Most of the acquisition price of aQuantive was good will, which is one of the intangible asset classes where Carthage Intellectual Capital Management (CICM) provides client services. One of those client services is monetizing intellectual property when they have losses that can offset taxable gains. In the case of aQuantive, Microsoft decided the acquisition really did fail and eliminated $6.2 billion from its balance sheet. Specifically it took a loss of US $6.2 Billion in goodwill. In accounting terms it’s called ‘impairment’. Hypothetically speaking, what could have Microsoft sold at a profit to offset its impairment losses? The answer is- part of its own patent estate. Self invented patents are especially nice because essentially 100% of the selling price is a capital gain. So they constitute the least amount of property you must sell to use up the impairment loss. But what if Microsoft still needs to use those patents? The answer is- license-back the patents it sells. (Not familiar with patent sale license-backs? Check www.carthageic.com to learn more.)
Maybe Microsoft knows this already. I checked the July 19, 2012 8-K statement in which Microsoft officially summarized its business performance in the three months ending on June 30. The word ‘patent’ never appears.
Perhaps Microsoft patents aren’t worth US $6.2 Billion. So we also checked the 8-K and 10-K statements for the last five years (2008 to 2012). Microsoft spent more than US $44.7 Billion in R&D in that period and obtained more than 13.7 thousand US patents according to the USPTO. That averages about US $3.25 Million in R&D per issued US patent. Would Microsoft be dumb enough to spend $45 Billion to obtain zero patent values? Definitely not.
We roughly estimately that a portfolio sale of 2000-3000 patents would be more than enough to satisfy the most conservative of investors. Statistically you wouldn’t even need to very picky because the odds of not buying some highly valuable portfolio assets collectively equal to the portfolio purchase price is pretty close to zero. Especially when Microsoft would be the back-licensee of the portfolio.
But this isn’t about Microsoft- it’s about managing the risk and value of intangibles. And impairments. We are living in times of economic uncertainty- the kind of times that produce impairments from a multitude of calamities. Carthage understands business risk and intangible value. And while Microsoft may not need our help to recover its losses you may know someone who does.