RMBS--Litigation sends Rambus stock skidding
By Dan Briody
Redherring.com, August 30, 2000
For some stocks, the advice of a lawyer can be more helpful than the advice of a financial advisor. Rambus (Nasdaq: RMBS) is one of those stocks.
In the latest litigious development surrounding the highly controversial intellectual property company, arch rival Micron (NYSE: MU) filed a lawsuit alleging Rambus has been collecting dues on invalid and unenforceable patents. The threat of legal action took its toll on Rambus's ultra-volatile stock, driving the price down 4 percent on the news.
The move by Micron is a shrewd legal maneuver, designed to be a preëmptive strike against a patent-infringement suit that Rambus likely would have filed against Micron. For years, the two companies have fought bitterly and defended their respective turfs, but the outcome of this particularly acrimonious battle could go a long way in determining the future of the memory business.
HIGH-TECH CATFIGHT
In the vague world of high-tech patents, many things are open to dispute. And over the past three months, Rambus has virtually reinvented half of its business by systematically pressuring competitors into legal royalty settlements over patents the company established as early as 1991.
Citing a patent on a cryptic technology developed a decade ago, Rambus has been able to convince Toshiba, Hitachi (NYSE: HIT), and Oki Electric to part with a percentage of revenues on all of their synchronous dynamic random access memory (SDRAM) and double data rate SDRAM (DDR SDRAM) memory sales. SDRAM and DDR SDRAM are memory technologies that compete with the proprietary Rambus Direct RAM (RDRAM) for space in PCs.
With the specter of a lawsuit staring them down, the companies complied and subsequently created a brand-new revenue stream for Rambus, to complement the more traditional licensing of their RDRAM technology to semiconductor manufacturers. Rambus is currently suing Siemens spin-off Infineon (NYSE: IFX), claiming the same patent infringement.
Not surprisingly, Micron is taking an over-my-dead-body approach to the situation, filing a lawsuit alleging the patents are bogus and unenforceable. And the battle will be crucial to Rambus's future. The hope of a continued stream of royalty agreements has buoyed Rambus's stock recently. On June 15, the company announced the Toshiba settlement, and its stock promptly enjoyed a two-day, 61-percent spike. When it announced the Hitachi news a week later, the stock basked in a remarkable one-week, 102-percent increase. All for dusting off a few crusty patents that everyone in the business had forgotten.
Now Rambus is going after the remaining players in the SDRAM and DDR SDRAM markets, hoping to garner royalty agreements across the board. Memory behemoths Samsung, NEC, and Hyundai Electronics, along with Micron, still remain on the Rambus hit list.
"The general perception has been that Rambus was entirely dependent on how quickly RDRAM could penetrate the PC market," says David Bujnowski, an analyst at UBS Warburg Dillon Read. "But now people are finding that Rambus has a revenue generator in SDRAM as well."
TIMING IS EVERYTHING
As a result of the new revenue source, analysts have gotten pretty bullish on Rambus, despite disappointing news coming out of its core RDRAM business. Intel (Nasdaq: INTC), Rambus's staunchest supporter over the years, announced recently that it would be supporting other forms of memory for its forthcoming Pentium 4 chips. The news was a blow to Rambus bulls, and the stock predictably slid. But since then, optimism over more royalty agreements was able to pull the price back up to levels seen before the damning Intel news. Morgan Stanley Dean Witter even upgraded the stock, citing the possibility of royalty revenue hitting $1 billion in a few years.
It is not known how the remaining SDRAM big guns will react to Rambus's legal overtures, whether they will take the route of defiant Micron or acquiesce à la Toshiba and Hitachi. Analysts think it is more likely that Samsung, Hyundai, and NEC will settle, sending the stock through the roof again on the news.
But the details of these settlements, past and future, are totally unknown. The amount of revenue to be gained could be insignificant, which would render the huge gains in Rambus's stock price temporary at best. Rambus could be offering very favorable terms to its competitors, especially since it is in everyone's interest to settle these disputes amicably.
Micron remains the wild card that could bring the whole ploy crashing back to earth. If not settled out of court, the suit could take years to decide. And given that SDRAM makers other than Micron are likely to settle, Rambus looks like it has the potential of huge short-term gains. But investors might want to keep Intel's noncommittal views about the rest of Rambus's business in mind and think about profit-taking if Rambus continues to soar on patent-related news. |
