Google's Day in Court
Jyoti is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Who would have imagined that Google (NASDAQ: GOOG), the giant of search engines, might have to bend down on its knees and agree to the terms of Vringo (NYSEMKT: VRNG). Vringo is basically a company providing software platforms for mobile video and social services like ringtones, Facetones, Video ReMix, etc. But now the company has been focusing predominantly on patent based mergers and filing lawsuits against some of the top big firms, which include the likes of Google, AOL, Target, etc.
The most recent is the lawsuit against Google where the court has instructed an out of court settlement. If they do not proceed with a settlement then a hearing is scheduled for Oct. 2. Vringo, after this announcement, raised $45 million by issuing 10.3 million shares (at a price of $4.35 per share) to institutional investors, one of their smart and well-timed moves. This is quite visible with the surge in its share prices which have increased by around 82% in only five days.
*Chart Source – http://money.cnn.com
This places Vringo in a strong position when dealing with Google at the settlement table. A company with cash backing of $55 million should have more bargaining power against the much larger Google. Sources say that Vringo is seeking $696M plus interest for historical licensing and could be asking for another $700M for future royalties (until 2016). Now in this mobile market with cut-throat competition, shelling out so much cash for patents may deeply hurt Google. Not only that, this would open floodgates for upcoming lawsuits that Vringo might file against Google.
Google’s Dilemma
The company, which has grown in terms of its market reputation, would not like to use others patents without paying royalty. It also means they would not like to invite future problems. Thus, Google is possibly looking at a buyout situation. Let’s take an analysis of the financials of Vringo:
Vringo’s Shares Outstanding: 92.3 million shares
Recent Share Price: Approximately $5.00
Total Market Capitalization: Approximately $77.47 million
Cash on Hand: $55 million, approximately 11% of Market Capitalization
Vringo would be expecting around $13-$15 per share, making the total deal worth a mammoth $1.2 - $1.4 billion. This would be a very heavy price for Google’s use of a few patents. However, this deal would provide certain benefits that Google would enjoy by acquiring this company. First, they would not have to pay any royalties for those patents--ever. Secondly, and most importantly, they might use these patents against the other giants like Apple and Microsoft in future lawsuits.
Rivals Apple and Google met last week, possibly to discuss the patent lawsuits that have been filed against them. Apple knows if Vringo wins a case against Google, their next possible target would be Apple. If Google doesn’t comes to terms with Vringo, then we are looking at Apple buying Vringo with a clear intent to grab their intellectual property. This would give Apple an upper hand against Google, and possibly Samsung in this Smartphone war. These patents would be primarily in the 3G and the 4G space. The only link between Google and Apple to this meeting was the lack of sufficient patent protection. This gives more reason for Google to buy Vringo and use them against Apple in the near future.
Apple currently launched its iPhone 5 and its sales figure has already crossed 5 million. They are also on course to launch their mini iPad to capture the untapped market. The only thing that would concern them is how deep Vringo could hurt them with the patent lawsuits in 3G and 4G space which would affect both their iPhone and iPad. If Google acquires Vringo then it might just get more difficult as they would have to pay a substantial amount of royalty for using these patents.
Conclusion
Google should try to negotiate the deal for a smaller value and acquire Vringo for its future. On the other hand if Vringo sticks to its original buyout price, which is not within the budgeted range of Google, then we might see them moving towards court on this 16th. Vringo is well placed in this deal and I am keeping a target price of $7.50 (deal or no-deal with Google), along with a cut off price of $3.50 for the next couple of months.
jyotiadvisor has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple and Google. Motley Fool newsletter services recommend Apple and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
