Decompose and Adjust Patent Sales Prices for Patent Portfolio Valuation

Abstract

In an effort to decompose and adjust patent sales prices for patent portfolio valuation, this study analyzes patent transaction data collected as of September 2012. After presenting the descriptive statistics, the analysis designates a hedonic-model-like specification to identify the value components and quantify component premiums. According to the model, the Nortel transaction in July 2011 did not fundamentally change the pricing of patent portfolio, and patent market has not been in bubble. Also, while NPEs play an active role in patent sale market, there is no difference in pricing between the transactions with at least one part being NPE and those with both parties being non-NPEs.

The econometric model reports a significant numerical effect of patent portfolio size, by which patent portfolio price increases nonlinearly with the number of patents in a portfolio. Besides the numerical effect, the analysis also suggests a possible ordinal effect, which means that patent portfolio pricing seems to be segmented by the scale of size of patent portfolio. Based on the value components identified and the premiums quantified, the model generates a benchmark price, an adjusted price and a forecasted price for each portfolio included in the study. The median prices per patent calculated from the benchmark prices and adjusted prices generally fall into a tight range of $150K to $220K.

As a sanity check, this paper finally analyzes two sets of price data collected from publicly-traded patent licensing and aggregating firms, which further corroborates the price range derived from the model. Additionally, the analysis also shows that when a firm’s patent portfolio is traded at a significant discount, about 25% to 30% discount to $100K in enterprise value per patent, it is deemed to be undervalued by the market, and therefore may be subject to takeover bids.

Keywords: Patent sales prices, patent portfolio valuation, NPE, patent bubble, strategic premium, industry premium, per patent price, benchmark price, adjusted price, stock market

JEL Classification: O32, O34, C13