Bloomberg News

Alibaba on Patent-Buying Spree May Avoid Tech IPO Pitfall

April 29, 2014

Alibaba app

A woman loads a page on the Alibaba Group Holding Ltd. app while using an Apple Inc. iPad in this arranged photograph in Hong Kong. Alibaba last month said it would begin the process of filing for a U.S. public offering that may be larger than the $16 billion raised by Facebook in 2012. Photographer: Brent Lewin/Bloomberg

Alibaba Group Holding Ltd. is beefing up its patent holdings in the U.S., a move that may help avoid the pitfalls that bedeviled Google Inc., Facebook (FB:US) Inc. and Twitter Inc. ahead of their initial public offerings.

China’s largest e-commerce company has so far obtained 102 U.S. patents, including 20 purchased from International Business Machines Corp. last year, according to researcher Envision IP. Alibaba has applications on more than 300 others for technology like payment processing, product recommendations and picture searches, the U.S. Patent and Trademark Office’s database shows.

“It’s a smart move,” said Maulin Shah, managing director of New York-based Envision. “When a company announces IPO plans, they instantly become a target from competitors already in the market who want to hamper the IPO or those who see it as an opportunity to exploit the company at a vulnerable time.”

Alibaba: China's E-Commerce Giant

Patents, designed to protect a company’s products from copying, are becoming commonly used as currency and as a shield against lawsuits by competitors. Facebook, at one point with just 12 patents before it went public, and Twitter with nine each found themselves exposed to legal claims that their products infringed other companies’ intellectual property.

“Right now is a time of great leverage with anyone who has an issue or potential issue with Alibaba,” said Jim Altman, a patent lawyer with Foster, Murphy, Altman & Nickel in Washington who often represents Chinese companies. “They don’t want anything hanging up an IPO.”

Yahoo Patents

Alibaba last month said it would begin the process of filing for a U.S. public offering that may be larger than the $16 billion raised by Facebook in 2012. While the Hangzhou, China-based company hasn’t said how much it will seek in the IPO, a person with knowledge of the matter said Alibaba may sell about a 12 percent stake.

Yahoo! Inc. (YHOO:US) owns a 24 percent stake in Alibaba and according to a recent court filing, holds more than 1,500 patents.

Ashley Zandy, a spokeswoman for Alibaba in San Francisco, declined to comment.

Seven other Chinese Internet companies have filed to raise a total of $2.8 billion in New York this year, none of which have a U.S. patent portfolio that could be found in a search of regulatory filings and the patent office databases. Weibo Corp., a microblogging service that began trading in the U.S. April 17, said in a regulatory filing it owns one Chinese patent and has applied for 26 others.

“There are companies in China that are starting to have a sense for the western standards of intellectual property,” Altman said. “Alibaba is shipping stuff into the United States on a fairly substantial basis. They want to play in the U.S. market.”

Increasing Value

Patents can help drive up the proceeds in IPOs for software firms, according to a 2012 study by a researcher at the University of Bordeaux in France. An additional patent obtained prior to the debut increased proceeds by about 0.9 percent, the study showed.

At the same time, the U.S. Supreme Court is considering possible limits to the scope of the types of e-commerce patents that Alibaba owns. The high court in March heard arguments on the standards for allowing patent protection in software, and yesterday heard arguments on what types of limits can be placed on broadly worded patents.

Eliminating potential litigation also can be important.

Twitter in October warned investors that its lack of a large patent portfolio could make the company vulnerable to litigation. And about 48 hours before its November IPO the San Francisco-based social-media company disclosed it was the target of infringement claims from IBM. Twitter would successfully raise $1.82 billion in its IPO and later settle with IBM in January by agreeing to buy 900 patents from IBM.

Facebook IPO

Facebook went through a similar fight with Yahoo and ended up buying 750 patents from IBM to settle the dispute in July 2012, two months after it began selling shares to the public.

Google paid Yahoo to resolve a patent dispute months before its 2004 public offering and later in 2011 bought more than 1,000 patents from IBM as part of its strategy to defend its Android operating system from infringement claims.

IBM, the world’s largest computer-services provider, declined to provide details of its patent sale to Alibaba. IBM, which has received the most U.S. patents of any company for 21 straight years, regularly strikes sales and licensing deals, Ken King, general manager of intellectual property for the Armonk, New York-based company, said in January.

Beyond the litigation risk, obtaining patents is a way to protect existing businesses from competition, and find new niches that it can profit from, said Don Fancher, a principal of Deloitte Financial Advisory Services in Atlanta.

New Revenue

“They’re trying to look forward and see where their strategic direction is in terms of building the business, and creating new revenue streams and do they have the patented technology to help them take that step,” Fancher said. “It’s a crowded field, but it’s also a hugely opportunistic field. Everything’s moving to e-commerce.”

Inventors based in the People’s Republic of China received 6,597 U.S. patents in 2013, the sixth highest of any non-U.S. country, according to patent office figures. In 2003, there were 424 patents issued to inventors based in China.

In the Asian market, Alibaba has more than 1,900 issued and pending applications, Shah said. In the U.S. the company filed 50 applications in 2011, 85 in 2012 and 104 last year.

“In their home market, they’ve been very active,” he said. “After their IPO, their patent filings will naturally increase here as well.”

To contact the reporter on this story: Susan Decker in Washington at sdecker1@bloomberg.net

To contact the editors responsible for this story: Romaine Bostick at rbostick@bloomberg.net; Bernard Kohn at bkohn2@bloomberg.net


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