What’s in it for RIM?

Patents. Currently RIM pays millions of dollars for patents to use in their blackberry devices. However, RIM would save some big figures with the purchase of Nortel’s patents, because the assets RIM is mainly interested in are patents Nortel holds in next-generation wireless technology called Long-Term Evolution, or LTE.

Analysts say the patents would reduce the millions of dollars in royalty fees RIM pays annually for technology it uses in its handsets.

Nortel has said the three bidders that entered into the auction– Ericsson, Nokia Siemens Networks and U. S. private equity firm MatlinPatterson — all agreed to the same terms it gave RIM, however, the auction did not include the sale of the LTE patents, Nortel’s lawyers said in court July 28.

The transaction has ignited a political firestorm over whether the assets, which include leading-edge technology for next-generation cellphone networks, should be allowed to be sold to a foreign firm or whether Ottawa should cancel the sale through national “net benefit” and security rules newly written into the Investment Canada Act.

There are 2 ways to review under the Investment Canada Act

(1) The final decision for the sale now lies with Industry Minister Tony Clement, who has said his ministry is checking into whether the deal deserves to be reviewed to see whether it violates the foreign-investment rules. The current rules demand a federal review of any asset sale to a foreign firm that exceeds $312-million.
(2) George Riedel, Nortel’s chief strategy officer told the committee the book value of the assets being sold was US$149-million. A separate review may be required if the sale is deemed a national-security concern, which carries no monetary conditions.

A senior government official told The Globe and Mail last week that Ottawa is evaluating the assets of the transaction at book value for the purposes of deciding whether the deal must be reviewed under the Investment Canada Act. Nortel and Ericsson have set the book value of their deal at $149-million, far short of the $312-million (Canadian) threshold that triggers a review.

Book value reflects the balance sheet value of a deal’s assets not including such intangible assets as intellectual property and employee talent.

Richard Corley, a lawyer with Blake, Cassels & Graydon LLP and counsel to Ericsson, says “High technology businesses are quite often asset-light.” “You are not buying the values of the chairs and the bits and pieces. What you’re buying is the earnings capacity.”

On national security, Ericsson says that as an equipment supplier it does not manage or control sensitive information. Further reason for the government to not interfere.

RIM’s beef over the pending sale of certain wireless assets of Nortel to a foreign rival, called on Ottawa to speed up the adoption of new rules in the Investment Canada Act that could be used to cancel the controversial transaction.
“RIM thinks that a $1.13-billion (USD) transaction must be reviewed to ensure that Canada’s national interests are met.”

Under current legislation: deals involving the sale to foreign firms of technologies in sensitive sectors such as telecommunications are subject to federal scrutiny and possible annulment. However, that applies only if the asset value exceeds $312-million. Nortel told a parliamentary committee that the book value of the wireless assets going to Ericsson was just $149-million, meaning a government review is not required.

On the other hand, the Canadian government has amended the Investment Canada Act this year to consider the “enterprise value” rather than book value in such deals. Enterprise value includes intellectual property and employees going to the foreign firm. The new rules, however, are not yet in force, leaving federal authorities to use the current framework.

Federal authorities have shown little enthusiasm for blocking the sale and Prime Minister Stephen Harper, has already stated there would be no attempt to alter Canada’s current foreign investment rules.

RIM releases a Survey: From market researcher Strategic Counsel that showed 55% of Canadians who were aware of the Ericsson sale were opposed to it.

More Spice in your life

At the end of August, the U. S. tax authorities sent chills to Nortel Networks Corp. creditors by submitting an unexpected and very large US$3-billion claim for back taxes, interest and/or penalties. If valid, the IRS claim would apply only to Nortel’s US unit, Nortel Networks Inc. Since tax claims often receive priority in a bankruptcy proceeding, this raises the possibility of wiping out a substantial majority of the claims from US bondholders, suppliers and employees owed severance pay.

The IRS claim may intensify the pressure for U. S. claimants in the meantime to prevent further transfers of cash from Nortel’s U. S. operations to Canada. Because under Nortel’s complicated global structure, the company shifts money from cash-rich regions such as the United States (where revenues from the sale of products generally exceed expenses) to jurisdictions such as Canada — which does a lot of expensive R&D but generates relatively few revenues for the company.

Canadian creditors had been concerned that Nortel Canada’s low cash balances would translate into a claims settlement ratio as low as 12¢ on the dollar, while U. S. and British claimants were expected to receive 45¢ on the dollar. But now the IRS bill could significantly deteriorate the U. S. return rate.