SAN FRANCISCO (CNN/Money) -
Investors scouring the Internet for technology companies to invest in typically carry a sort of checklist, a list of qualifications that companies must meet to earn their investment dollars.
Things they watch for include healthy profitability, reasonable profit margins, a rational price-to-earnings ratio, a good roster of products, sufficiently competitive standing, and nice industrywide growth trends. These days, however, investors need to add one more requirement to the list: an impressive patent portfolio.
Assessing a company's patents "should be part of an investor's initial due diligence," said Neil Smith, a partner at Howard Rice Nemerovski Canady Falk & Rabkin. Smith points to research analysts hiring patent attorneys to review a company's prospects as one sign that patents have taken on new relevance in today's marketplace.
The last two weeks have brought a rash of patent-related news in the technology sector. Microsoft (MSFT: Research, Estimates) and Yahoo! (YHOO: Research, Estimates) both settled patent-related suits against them, and eBay (EBAY: Research, Estimates) found itself on the losing end of a $30 million patent judgment.
Most recently, Research In Motion (RIMM: Research, Estimates) (maker of the ubiquitous BlackBerry wireless device) was found guilty of infringing on a key patent owned by NTP. The judge in the RIM case filed an injunction against the BlackBerry maker, forbidding it to sell its device in the United States until 2012, when the patent expires.
RIM is expected to appeal the decision (it has 30 days to do so), and it's in NTP's best interest for RIM to appeal so it can work out a lucrative licensing arrangement with the company and earn revenue on each BlackBerry device sold.
When the lawsuit judgment was announced last week, investors battered RIM shares, sending them down 10 percent at one point before they recovered to a slight loss.
The relevance of patents isn't limited to litigation. A company's patent portfolio is often an important indicator of its prospects as a takeover target. When Yahoo! acquired Overture (OVER: Research, Estimates) last month, Overture's 60-plus patents -- and its vigorous enforcement of those patents -- were considered among the selling points in the deal.
Earlier this year, Hewlett-Packard (HPQ: Research, Estimates) announced it was seeking ways to generate more revenue from its sizeable patent list. As such, the RIM patent ruling probably kills the recent rumors of an HP takeover of the company.
Ain't what you do, it's the way that you do it
Patents took on more importance for tech investors after a 1998 court decision established the validity of "business method" patents. Since the ruling, the number of business method patents has skyrocketed, from 195 in 1997 to 2,153 in 2002.
Internet companies such as Amazon (AMZN: Research, Estimates), Priceline (PCLN: Research, Estimates), and Netflix (NFLX: Research, Estimates) have received both cheers and jeers for scoring patents on a number of key operations methods.
"In competitive industries, patents become more valuable," said Greg Aharonian, publisher of Internet Patent News, an e-mail newsletter. "People should pay more attention to patent issues because they can make or break a company."
Where can investors turn if they want to keep abreast of patent developments? One source, of course, is the patent office's Web site. Signing up for e-mail newsletters such as Internet Patent News is another option. And companies typically disclose patent developments in their quarterly or annual filings.
While simply knowing which patents a company possesses and its litigation strategy isn't a direct line into a company's prospects, in today's tight economy, a firm's ability to squeeze money out of patents takes on a higher priority. So staying informed on patent issues should therefore become a higher priority for investors.
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