In a multi-day auction, the consortium of six technology companies including iPhone maker Apple Inc. (AAPL) won the bid to acquire Nortel Network Corp.’s intellectual assets for an estimated $4.5 billion.
Besides Apple, the consortium comprises EMC Corp. (EMC), Ericsson AB (ERIC), Microsoft Corp. (MSFT), Research In Motion Ltd. (RIMM) and Sony Corp. (SNE) won the right to Nortel’s patents and thereby gained the access to a pool of technologies used in mobiles and tablets. The transaction process is expected to be completed by the third quarter.
The sale is subject to Canadian and U.S. court approvals, which will be effective after a joint hearing expected on July 11, according to Nortel.
Google Inc.(GOOG) showed substantial interest in the patents but ultimately bowed out. The company had initially placed a $900 million bid for the Nortel assets last April.
According to sources, of the $4.5 billion to be paid to Nortel, RIM’s contribution is about $770 million and Ericsson $340 million. However, other financial details were not available.
Nortel’s intellectual property consists of more than 6,000 patents and patent applications r wireless, wireless 4G, data networking, optical, voice, Internet, service provider, semiconductor technologies, among others.
Of all the patents and patent applications, most of the smartphone companies, especially Apple, were vying for the patents relating to the 4G and Long Term Evolution (LTE) technologies.
Given the inherent advantages of the 4G technology compared to the conventional 3G technology, the former has gained tremendous popularity among mobile companies. The 4G technology not only accelerates the data transfer rate, but also reduces transmission error. The technology is more secure than 3G, and uses Internet Protocol address system similar to the Internet.
Separately, LTE uses radio waves to allow more data to be transferred over the same bandwidth used by 3G equipment. As a result, service providers should be able to get more data transferred out of their existing cells, and possibly lower the cost of running their networks.
LTE, which is currently under development, allows wireless providers to shift from 3G technologies to 4G networks and equipment using GSM (Global System for Mobile communications) and CDMA (Code Division Multiple Access) types of networks. However, LTE is not expected to be available for widespread use until 2012.
We believe Apple and Microsoft will likely be the main benefactors with the 4G and LTE technology. Apple has been facing stiff competition from Google’s Android-based handsets and has lost significant market share over the last few quarters. We believe a new upgraded 4G iPhone is absolutely necessary for Apple to boost its declining market share. Hence, the win at the auction will improve its chances of launching a 4G iPhone in the near term.
Nokia Corp.(NOK) on the other hand will be launching its new smartphones based on Microsoft’s Windows Phone 7 (WP7) operating system. Therefore, this win will enable the company to upgrade to 4G status going forward.
In the United States, there are two major systems using 4G mobile technology. One is known as WiMax and is backed by Clearwire, a subsidiary of Sprint Nextel Corp. (S). The rival system, LTE, is backed mainly by Verizon Communications Inc. (VZ). Now that the other companies have gained access to the technology, consumers will have greater options.
In the long run, we have Neutral recommendation on Apple Inc, EMC Corp, and Microsoft Corp. However, for Sony Corp and Research In Motion Ltd we have an Underperform rating.
Currently Apple Inc, EMC Corp and Microsoft Corp have a Zacks #3 Rank, which implies a Hold rating in the short run. However, Sony Corp has a Zacks #4 Rank implying a Sell rating in the short term. Research In Motion Ltd has a Zacks Rank of #5 implying a Strong Sell in the short term.
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