Telecom: In Wi-LAN, a path for Nortel's rebirth?

By J. Sturgeon | Ottawa Citizen | March 3, 2010

TORONTO -- It was in early 2006 when Wi-LAN Inc.’s board was forced to make a bold decision. Faced with a fast-approaching bankruptcy, the Ottawa-based telecommunications equipment maker moved to radically alter course and once and for all sever its deteriorating manufacturing operations.

“There were no employees left, very little cash in the bank and debts were more,” said Jim Skippen, Wi-LAN’s chief executive. “It was a desperate situation.”

Wi-LAN approached the would-be CEO, then working for cross town rival Mosaid Technologies, and persuaded him to help purge the firm of its business lines and focus solely on obtaining licensing royalties from its small but powerful patent portfolio.

“That was the only possible option, the manufacturing had not worked out very well and the company was in serious financial straits,” he said in an interview.

In the four years since the brush with near-collapse, Wi-LAN has seen its growth profile rise steadily. Now, the firm of roughly 40, comprised mainly of engineers and lawyers, is on the brink of its biggest financial windfall to date. An upcoming hearing in a long-running litigation process against some of the largest handset and wireless device makers in the business including Apple Inc. all but promises to net the firm tens of millions in recurring revenue, analysts say.

In Wi-LAN’s rebound there may lie a pathway to resurrection for a much, much larger telecom compatriot: Nortel Networks Corp.

Similar to Wi-LAN, Nortel’s fate as a maker of wireless and wireline networks was sealed when it filed for creditor protection on Jan. 14, 2009. Nortel filed under a mountain of debt that surpassed US$10-billion. To settle up with a long list of creditors, Nortel has proceeded to auction off its core operations through a handful of so-called “stalking horse” sales since.

The sales of its vaunted wireless and enterprise network businesses have generated more than US$3-billion, however, the Toronto-based firm only held $5.7-billion in assets as of Sept. 30. The auctions have handed rivals like Sweden’s Ericsson AB and New Jersey-based Avaya Inc. key assets and personnel as well as the legacy of the 128-year-old Canadian firm.

“The corporate structure that was in place simply does not exist now,” said one former executive that has moved on to one of the successful bidders.

But, Nortel has retained an enviable portfolio of patents -- about 3,000 across a product base encompassing advanced, next-generation wireless networks and ultra-high speed broadband technologies. Certain companies, including Wi-LAN, have been approached by Nortel to gauge interest on a sale. But there is much speculation that Nortel is considering another option.

“They’ve talked about maybe going it alone with their patents,” said Peter Imhof, a fund manager with Sprott Asset Management.

“It’s absolutely conceivable,” said Joseph Compeau, professor of information systems at the University of Western Ontario’s Ivey School of Business. “There is a model there to license this stuff. Especially the LTE portfolio.”

Led by a suite of patents covering cutting-edge wireless technology vaguely termed Long-Term Evolution (LTE), some have pegged the value of the entire portfolio at US$1-billion.

For months Nortel has been weighing a one-time payment of that magnitude against emerging from bankruptcy as a patent licensor. “It came down to whether they were going to sell them for a big chunk of cash or was there more value in getting a recurring dividend on them,” the former Nortel executive said of the situation before he left.

A spokesperson for Nortel declined comment. Ridout & Maybee LLC, an IP law firm in Toronto that represents Nortel, also declined comment.

There may be good reason in hanging on.

The size of Wi-LAN’s telecom patent portfolio is less than a third of Nortel’s. About 50 of those form the nucleus of what Wi-LAN developed over a decade and a half as an operating entity. Through numerous licensing deals, Wi-LAN has grown into a thriving concern. Its biggest came in 2007, when Finnish handset maker Nokia Corp. signed an agreement worth US$49-million, which included handing over of some additional patents to Wi-LAN.

Now, two nondescript patents named 222 and 802 pertaining to local-area WiFi and CDMA cellular networks, respectively, lie at the heart of a dispute with nearly 20 manufacturers of wireless products, including Apple.

On March 11, the company will attend a so-called Markman hearing in a Texas court that will define the parameters of what the two patents cover. The Markman will give Apple and others, including PC makers Dell and Hewlett-Packard a sense of whether the court believes those firms are willfully infringing on Wi-LAN’s patents.

Failing a financial settlement, a trial is scheduled for next January. Most companies simply will not take the risk. Instead, Mr. Skippen says more than 90% of patent cases are settled “on the courthouse steps.”

Sean Peasgood, equity analyst at Wellington West Capital Markets, says the date will serve as a “catalyst” for Wi-LAN’s bottom line. The public firm is expected to generate between $28-million and $50-million in revenue this year. But the analyst suggests the firm could bring in as much as $100-million as settlements are signed.

That does not approach the billions of dollars a company the size of Nortel generated during its heyday, but revenues in that range and higher collected on a patent portfolio of a few thousand could go a long way in making creditors whole if they are patient, as well as address pension shortfalls.

Still, in Nortel’s case, the idea of a reborn company may be a pipe dream. “There’s a lot of people pulling for pieces of the company,” said Mr. Peasgood, who has covered Nortel. “Whether the company can move forward and try and monetize those patents, I’m not sure.”

Patience is not a virtue found in most bankruptcy proceedings, he said. “Generally, the rule of thumb is, that on a new licensing program, it can take two years to get up and running.”

As for Wi-LAN, its board pursued the licensing strategy before it ever had to file under the Companies’ Creditors Arrangement Act and therefore was not forced to leave ultimate decision-making powers to a judge, whose main focus is getting as much value back to stakeholders as orderly and quickly as possible.

“It’s much harder to do this once entered into bankruptcy. You don’t have that flexibility,” said Mr. Skippen, who admits that his company would be interested in the event of a formal sale of Nortel’s patents. “[Nortel] waited too long maybe.”

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