Google Inc. (NASDAQ:GOOG) started its patent trail with Vringo, Inc. (NYSEAMEX:VRNG) this week. Vringo is a tiny company in comparison to Google, with a market cap that’s sub-$250 million, while Google trades at a market value around $250 billion. However, in the patent game it is more about what you have in your patent arsenal versus company size. Vringo is taking Google to trail in an effort to seek a multi million verdict for search patent infringement.
Google Inc (NASDAQ:GOOG) has opted not to settle, deciding to fight the so-called ‘patent troll’ in court. The lawsuit alleges that Google has violated Lycos’ search and search advertising patents that Vringo owns. Lycos is one of the pioneer search engine companies from the mid-1990s.
However, just as Google Inc (NASDAQ:GOOG) is seeing pressure from Vringo, could Microsoft Corporation (NASDAQ:MSFT) or Yahoo! Inc. (NASDAQ:YHOO) be next? There has been speculation that perhaps Microsoft or Yahoo should buy Vringo and use the patents to sue Google directly. However, neither company has shown interest. On the other hand, Google could potentially purchase the company and use the patents against Microsoft or Yahoo. Yet, none of these things have materialized and Google has chosen to not even settle, leading us to believe that perhaps there is more smoke than fire at this point.
Google Inc (NASDAQ:GOOG) continues to exert its dominance in the search market, owning over 66% of the market per comScore’s latest market share numbers. Microsoft’s Bing moved up to 15% and Yahoo came in at 13%. Worth noting is that if any issues arises concerning Microsoft’s or Yahoo’s search methods, ramifications can very well fall back on Microsoft, at its software powers the Yahoo search engine per a partnership the companies entered into in 2009.
The actual damages sought by Vringo are unknown, but estimates range from $300 million to $700 million and a few beyond that, in the billions. These possible damage awards, albeit small in comparison to Google’s $43 billion in cash and short-term investments as of 2Q, are massive numbers compared to Vringo’s market cap. Vringo could really use a big break and many investors feel this is their big ticket, as the company has lost at least $6 million in each of the last four years. However, for Google Inc (NASDAQ:GOOG) not to spend the relatively small amount of cash to snatch the company up with an outright acquisition leads us to believe that Google wants to make an example out of Vringo for future patent trolls.
Vringo’s recent addition of 500 plus patents from Nokia Corporation (NYSE:NOK) brings an interesting dynamic to the company beyond the search market patents it is putting to use against Google—see more about why Google and Apple should team up against Vringo. Nokia has struggled for the last five years as it has seen its position in the mobile phone market dwindle. The company has a lot riding on its Lumia series, which runs Microsoft’s Windows 8 mobile operating system. Nokia sold off the small patent portfolio to Vringo in August in an effort to raise cash and re-invest in its core business, mobile phones. The deal netted Nokia $22 million and affords the company a portion of any future profits that Vringo receives in patent cases. Vringo recently raised over $30 million for acquisition of the Nokia patents, but the big gamble for Vringo is that if they lose the Google Inc (NASDAQ:GOOG) lawsuit they will be hard pressed to raise capital to fund other litigation battles.
The real question is whether taking a position in Vringo could pay off big time? The risk-reward profile is too rich for our blood. The company likely already has a large amount of upside baked into the stock price, but a potential loss on the lawsuit could seriously set Vringo back, and send the stock down in a hurry. This is due to the fact that there is very little the company has as far as assets and operations, besides a stout patent portfolio, which is holding the company’s stock price up.
There is much speculation on whether Vringo can pull off such a feat, with the company’s stock price up over 350% year to date. There are a few fund managers that are betting that Vringo at least has a fighting chance at winning. The overall fund interest is very small, but two top fund managers, Israel Englander and Ken Griffin, both took new positions in the company during 2Q. Even Mark Cuban joined the speculation party in April by purchasing over 7% of Vringo’s shares.
Vringo has a lot riding on this trail, with the company operating with a negative equity of 1.4 million as of 2Q. There’s no doubt that if Vringo wins the lawsuit they will see quite the boost in stock price, but the question then becomes what does Vringo do with its winnings, go sue another company over patents? The fundamental with this way of operating is that patent suits tend to be very unpredictable. We believe that the potential upside does not make up for the potential downside that the stock will face if they lose the lawsuit to Google Inc (NASDAQ:GOOG).