The Hidden Value of Dell: 3,449 Patents and Other Intellectual Property

So Dell (DELL) isn’t going so quietly into a one-bid buyout. News this morning that rival bidders Blackstone Group (BX) and Carl Icahn got potentially superior offers to Dell’s special board committee set the PC maker’s shares popping.

What do they see in Dell? One answer may be the company’s intellectual property—brands, inventions, designs, or other nonphysical assets that have value to a company. In its March 8 report Dell’s Bargain Bin Pricing, M•CAM, a Charlottesville (Va.) firm that specializes in valuing corporate intellectual property, weighed the potential value of Dell’s IP, much of which the company has acquired via acquisition as it has moved from hardware into tech service markets. The firm notes that Dell had 3,449 patents and an additional 1,660 patent applications pending as of last year, according to its U.S. Securities and Exchange Commission filings. “While there is a perception that Dell is not very innovative,” says the M•CAM report, “careful analysis of its IP portfolio reveals unaccounted-for value.”

Carl Icahn and Dell’s special committee declined to comment, but a source close to the deal says its bankers are cognizant of Dell’s patent value. What exactly that is is hard to pin down. To judge the commercial fitness of Dell’s patents, M•CAM scored them with its data mining algorithms; the tests also measure the transferability of each patent. Overall, it reports that 47 percent of Dell’s IP portfolio scored as commercial. Of the 17 separate technical categories, the company scored higher than 50 percent commercial in four: graphics processing, data transfer, networks, and switches.

There is recent precedent for IP wildcatting. A year ago,Microsoft (MSFT) paid AOL (AOL) $1 billion for some of its patents, a windfall that sent previously moribund AOL shares up 43 percent in one day. Bankrupt Nortel Networks (NNTA) gratified its creditors by auctioning off more than 6,000 mobile computing patents for $4.5 billion. Struggling Alcatel-Lucent (ALU) is attempting to use its prized Bell Labs IP as financing collateral. And in a back-to-the-future irony, Google (GOOG) and Apple (AAPL) have been looking at Kodak’s patents.

“The asset class is often misunderstood and difficult to price,” says David Pratt, M•CAM’s president. Many investors don’t realize that intellectual property can generate real money for a company. For example, Dell could license its network switch technology to a rival, potentially creating a stream of payments that have little to do with Dell’s own manufacturing and sales cycles.

“Does Dell truly not know it has strong market controls in its new business segments?” the report, written before the latest offers, asks. “Or is Michael Dell fully aware of these assets and is perhaps waiting to competitively transact in these spaces once the privatization plan is successful? Investors deserve to have clarity on these points.”

BusinessWeek