Over four intense days last June, the New York office of Cleary Gottlieb Steen & Hamilton was home to a tech industry battle royal—the auction of bankrupt client Nortel Networks Corporation’s trove of more than 6,000 patents and patent applications related to smartphone technologies. At the contentious bidders’ table, Google Inc., Apple Inc., Rockstar Bidco—a consortium of five companies that included Microsoft Corporation and Sony Corporation—and two other tech titians faced off against each other. Along with the Silicon Valley rivals, Cleary’s forty-sixth floor was crowded with more than 100 people: Nortel debtors from around the world, members of the official creditors committee, not to mention everyone’s lawyers.
“The sale was unprecedented,” says Cleary bankruptcy partner Lisa Schweitzer. “In or out of bankruptcy, a stand-alone patent portfolio of that size had never been sold—we were starting from whole cloth.”
Also unprecedented: the whopping $4.5 billion Schweitzer and her team fetched after the giants of the tech world fought through 20 rounds of bids. “I guess the phrase is gobsmacked,” says Nortel chief strategy officer George Riedel of the winning bid made by Rockstar Bidco. “Whether you’re stunned or elated, you don’t know which is which.”
The patent auction was the seventh and final asset sale in Nortel’s long and complicated bankruptcy. Toronto-based Nortel, once one of North America’s largest telecom companies, filed for bankruptcy simultaneously in Canada, the United States, and the United Kingdom in January 2009. The global company, which had 140 affiliates in 150 countries, made the decision to carve up and sell off businesses and assets through the U.S. Chapter 11 process.
Soon after filing for bankruptcy, says Schweitzer, Nortel, a longtime Cleary client, decided to hold back more than 6,000 patents, which cut across various businesses, in lieu of selling them off in connection with the other assets. That decision was largely made because “no one really knew what they were worth,” Schweitzer says, and Nortel wanted a “true market test.”
The first test came in April of last year, when Schweitzer and her team secured a stalking horse bid of $900 million from Google. It became clear that the patent-thin search giant was willing to shell out a hefty sum for the patents, upping the ante for its competitors.
The trick of the auction, says Schweitzer, was creating a set of rules that could play off that competitive tension. The key was allowing the debtors to decide if and when the bidders could join up. “You want to keep the different parties separate from each other and bidding against each other,” says Schweitzer. “But also, when they start running out of money, you can allow them to pair up in ways that keeps the price going up.” During the rounds, Nortel, with Schweitzer’s advisement, let Apple team up with Rockstar Bidco. Nortel also allowed Google to pair with Intel Corporation.
Schweitzer describes her role at the auction as the traffic cop. The majority of her time was spent talking to the bidders, addressing their concerns, and encouraging them to keep going. She and her team also scuttled back and forth between the bidders and the multitude of Nortel factions, trying to understand the ins and outs of each bid.
That process, during the final few rounds, came down to live bidding. “It was ‘going, going, gone’ at the end—like you’d see at Christie’s,” says Schweitzer. “They’d stare at the whites of each other’s eyes and bid against each other.” At the end it was Google and Intel against Rockstar.
Now, says Schweitzer, “everyone wants to monetize their patents because they see the success of the Nortel sale.” Indeed, in the wake of the Nortel auction, patent portfolios are driving deals. Just a month after Google’s loss at the auction, the search engine giant shelled out $12.5 billion for Motorola Mobility Holdings, Inc., a company with more than 17,000 patents. And other businesses with financial troubles are now taking a closer look at their own patents. For instance, industry analysts have said that bankrupt Eastman Kodak Company could fetch as much as $3 billion for its digital imaging patents.
By designing and leading the Nortel auction, Schweitzer not only laid the groundwork for a record-breaking patent sale—she helped change how companies view and sell their patents. And that’s, well, pretty unprecedented.
Deal In Brief
Nortel Asset Sale
Value $4.5 billion
Firm’s Role Debtor’s Counsel