Silver Lining of Akamai Patent Suit

A recent patent suit which was filed by Akamai against Contendo has resulted in a buyout of Contendo by Akamai. The patent infringement case was filed by Akamai about one year ago, and the fact that it resolved in a $268 million bid in cash for Contendo is a good sign that there is a silver lining to many patent suits today. It is also a reflection of the fact that Akamai saw value in Contendo’s business as more than just a copy cat of its intellectual property.

This is one of several similar cases in recent weeks in which patent infringement suits have led to buyouts or acquisitions. For example, Nuance Communications also bought out a smaller rival called Vlingo following a patent suit lodged against this voice recognition company.

A patent infringement lawsuit is increasingly a sign that a start up company has potential in the tech world, and the pattern seems to be that more of these companies are resolving the suits in a positive manner through acquisitions. This pattern became evident back in 2007 when Data Domain issued millions to Quantum as part of the settlement terms on a patent infringement case.

Two years later, Data Domain was purchased by EMC for over $2 billion, which represented a doubling in price from the IPO issue. Quantum, on the other hand, has seen their stock drop by more than 25% since the IPO of Data Domain due to falling tape system sales, which have decreased by more than 30% year on year to around $250 million.

Another way of looking at the patent suit resolution between Akamai and Contendo is that it helps to bolster Akamai’s competitiveness. Unsurprisingly, news of the deal caused the share price of Akamai to pop when the deal was announced. Another aspect of the story to consider is how the lawsuit and acquisition will affect the relationship of Contendo with AT&T. It is rare for a company like Akamai to get a deal on a company like Contendo for such favorable terms.

The total cash buy out for about $268 million represents 6 times the revenue estimates for Contendo for fiscal year 2012. Wall Street pushed up the market cap of Akamai to $1 billion on news of the deal because it represents an answer to the assault on Akamai’s business and shows the company has found a way of fighting back.