RIM Investors Should Prepare For Big Settlement


Investors in Research in Motion Ltd. should be prepared to see the BlackBerry maker pay close to $1 billion if it settles its long-running legal battle with NTP Inc. for terms that are looking both reasonable and possible. A settlement with the small patent-holding company that won a patent-infringement case against RIM is more likely than it was a month ago, now that the two parties are talking through a mediator and after several more legal setbacks for RIM.

The two sides are waiting for Judge James Spencer of the U.S. District Court for the Eastern District of Virginia to schedule a hearing in the next few weeks to decide whether RIM should be barred from selling its popular product in the U.S. Such an injunction could strike a severe blow to RIM’s business by causing it to lose market share that would be hard to recover, especially now that Motorola, Nokia and others are rolling out competing handset products.

Spencer had issued such an injunction more than a year ago but that ruling was suspended while Research in Motion appealed a jury finding that it violated some NTP patents. The appeals court upheld enough of the ruling to keep RIM on the hook for damages, and last month Spencer rejected RIM’s request to enforce a $450 million settlement between the two sides that collapsed earlier this year.

RIM is still hoping that its case will be taken up by the U.S. Supreme Court, which denied it an immediate stay in October but kept open the long-shot possibility of a review in early 2006.

Nevertheless, Wall Street analysts are starting to add up just how much a settlement might cost, and a Nov. 30 report from Goldman Sachs pegged the hit to RIM’s cash reserves at between $3.78 and $5.04 per share, or between $750 million and $1 billion.

That would amount to 60% to 80% of RIM’s cash and short-term investments, which totaled $1.2 billion as of Aug. 27. RIM had $163 million in a restricted cash account set aside for the settlement as of that date.

A separate analysis done by MarketWatch suggests a settlement amount of between $800 million and $1.1 billion. That analysis was based on RIM’s current revenue mix, consensus expectations for its sales growth through 2007 and a conservative long-term revenue growth rate of 10% annually.

In the analysis, we assumed that RIM will agree to pay NTP 5.7% of its U.S. sales of handheld devices between November 2002 - when a district court jury found that RIM should pay NTP that same royalty rate in the patent-infringement case - and July 2012, when the disputed patents expire.

Because the jury arrived at that same amount in the original trial, NTP would consider a proposal along those lines as “reasonable,” a source familiar with the situation told me. But another source told me two weeks ago that RIM’s attorneys “haven’t been at the table.”

After a round of calls this week, it’s unclear to me whether RIM has actually put an offer on the table. The company has said only that it is communicating with NTP through a mediator.

The $1 billion settlement figure estimate may prove high, given that RIM isn’t devoid of bargaining chips if and when it sits down for serious talks. The U.S. high court may yet take its case on the grounds that U.S. patent law shouldn’t apply in the case because the firm is based in Canada.

An appeals court, citing extranationality, has already ruled that RIM’s wireless email service itself isn’t infringing upon technology covered by the disputed patents. The appeals court also reversed six of the original 16 patent claims and sent three more back to the district court for re-adjudication.

But that same court agreed with Judge Spencer and a jury in his courtroom that BlackBerry devices are covered by the patents because most of their users are in the U.S. That means any settlement amount likely will be based upon how much revenue RIM is expected to get from BlackBerry users in the U.S. between 2002 and 2012.

Wall Street analysts surveyed by Thomson Financial expect RIM sales to rise 55% to $2.09 billion for the fiscal year ending in February 2006 and climb 32% to $2.76 billion for the following fiscal year. The company has racked up $2 billion in sales since the jury award started the clock ticking on damages.

The legal overhang, and fears of increased competition from Nokia, Motorola and the startup Good Technology, has taken its toll on RIM shares this year.

The stock is starting to behave like that of Rambus Inc. (RMBS) - no stranger to long-term legal battles over chip-technology patents - by rising or falling on news of RIM’s latest legal victory or defeat.

Earlier this month, the shares took a hit after technology research firm Gartner Group advised its corporate clients against any new Blackberry deployments for what it called “mission-critical” applications. Gartner predicted a settlement this month.

RIM shares have fallen 20% this year, compared to a 4% gain for the Nasdaq Composite Index, and have ranged from a low of $51 to a high of $103 in the past 52 weeks.

That has some analysts, including those at Goldman Sachs and Standard & Poor’s, recommending the shares to research clients.

“We believe RIM shares are attractive despite increased competition and the potential risks from the outstanding lawsuit by NTP,” S&P said in a research note Dec. 10.

That may prove true, but investors may want to watch the legal front and wait for a dip that the resulting volatility may provide before entering. They may also want to remember the adage to sell on the rumor and buy on the news, which, if it holds, will mean that the shares could move higher once its legal problems are settled.