Michael Murphy's New World Investor
Burst.com Settles With Apple
Mon, 26 Nov 2007 09:20:19 ET
In one of the strangest press releases of all time -- it was put out well after the close on Wednesday, when they knew everyone had left their desks for Thanksgiving -- Burst.com (BRST) announced that they had settled their lawsuit with Apple for $10 million, that they would net $4.6 million after legal fees and expenses, and that they would make no further comment. On the face of it, it was a devastating conclusion to what should have been a $100+ million settlement, and Wall Street cut the stock in half during the holiday-shortened Friday session.
But over the weekend, I did a lot of work on this, and I think BRST is a buy, not a sale.
First, look at the timing of the settlement. Judge Patel recently ruled in favor of Apple and invalidated 14 of Burst.com's patents, but at the same time ruled in favor of Burst.com by reaffirming 22 patents. Those 22 patents put BRST in a good position going into the February trial. Apple's damages could have ranged from $100 million up to as much as $1 billion if they were found guilty of infringing. The pressure on Apple to settle before trial would have gotten stronger and stronger, the closer we got to February. So why settle now, unless there is a hidden agenda? Which I think there is -- read on.
Second, look at the timing of the announcement. I saw it a little after 5 p.m. ET on Wednesday, and Burst's management was clearly trying to sneak it by all the gurus and commentators. It worked, too. With a couple of exceptions, the story was buried in one paragraph deep in the business section, and by today it was old news not worth commenting on. Why did the company want to do that? I think they simply did not want too many of their future lawsuit targets looking too hard at the news. Although they put the press release up on their website briefly, they then took it down and as of this morning, it is still missing.
Third, the language of the settlement is some of the strangest you will ever see. I was especially intrigued by this:
"Apple agreed to pay Burst a one-time payment of $10 million cash in exchange for a non-exclusive license to Burst's patent portfolio, not including one issued U.S. patent and three pending U.S. patent applications related to new DVR technology. Burst agreed not to sue Apple for any future infringement of the DVR patent and any patents that might issue from the pending DVR-related applications."
Say what? The license to Apple does not include one issued and three pending patents on DVR (Digital Video Recording) technology. But if Apple infringes those patents in the future, Burst.com promises not to sue. How is that different from just giving a license to Apple to use all the patents?
I think the answer is that Apple has agreed to license and pay royalties on the DVR patents in the future, when and if (a) the patents issue, (b) Apple needs them and (c) Burst.com successfully enforces them against at least one other DVR manufacturer. That's why this one-time payment excludes the DVR patents. Why would Apple eventually need them? Because they are planning to add DVR to the faltering Apple TV box, to take TiVO head-on.
So, Apple would have been happy to quietly include the DVR patents in the settlement. But Burst.com did not want to put an implied value on the patents -- "Your Honor, these patents were a small portion of the patent portfolio Apple licensed for only $10 million." I think that's because BRST is planning to sue TiVO, possibly with Apple's support. Apple would like nothing better than to see all the other DVR manufacturers having to pay large royalties to Burst.com, while Apple has a sweetheart deal in return for its help with a TiVO suit. This kind of settlement happens in Silicon Valley; it's just part of the game.
Fourth, look at the language that wasn't there. There was no comment by Burst's management about why they settled, or what this might mean, or what they might do next. Instead, we got this:
"The company will not be further publicly addressing issues or answering questions regarding subjects that the Company's Board of Directors has not yet adequately addressed or resolved, or regarding subject matter that the company's legal counsel has advised is either privileged in nature, or should not be discussed for strategic or other reasons. As the Board and management make further determinations regarding the matters discussed in this Release and other matters involving the Company's future operations, the Company may, at its discretion, make further announcements to all shareholders and will also post those announcements on the Company's web site."
Of course, the fact that this press release almost immediately disappeared from the Company's web site is the height of irony. Why not comment? You made a sneak, disappointing announcement with no explanation, the market cut your stock in half, and your only response is that the company will not be further publicly addressing issues or answering questions? Time to get into the 21st century, gang -- corporate governance, shareholder rights and all that sort of thing, you know. Oddly, this is just begging for a minority shareholder lawsuit to block the settlement, which surely can't be what Burst.com management wants. Or is it? The mystery deepens.
Burst.com has $3 million in the bank and burns about $550,000 a year for officer salaries and legal expenses. Management says that they might distribute part of the Apple settlement to shareholders. Although it takes a little digging to find the number of outstanding shares, which is not listed on the quarterly financials on the company's website, there are about 40 million shares outstanding. So the distribution will probably be towards the low end of a five-cent to 10-cent range.
At Friday's close of 28 cents, BRST has a total market value of only $11.2 million. Subtracting their cash plus the Apple settlement, the market is giving the patents a value of only $3.2 million. Yet, they just had a disappointing $10 million settlement with Apple to use the patent portfolio, and there are many, many more companies that Burst can sue. Their argument now becomes: "Microsoft settled for $60 million, Apple settled for $10 million, you are violating our patents that have now been through an intense judicial review, so let's talk." I don't see how the patents Apple licensed can be worth less than $25 million to $50 million in additional settlements.
On top of that lays the DVR patents. While it is possible than none of the three unissued patents will ever be granted, Burst.com has a history of getting some very strong patents. It is also true that these patents, if they issue, will have to go through the same challenges and judicial review that BRST's 22 other patents just survived. But if I am right, and Burst.com files suit against TiVO next, the stock will go from 28 cents to back over $1 in a hurry. The same will happen if they start notching up more settlements, especially if future deals include a royalty stream.
So if you already own BRST, or if you want to put a little money into it to see how it works out over the next year or two, it is time to double up and buy BRST under a tighter 50 cents a share limit for an unchanged $2 target. If you can start a position or double up under 30 cents a share, so much the better.
Sincerely,
Michael Murphy, Editor
New World Investor
