Should Investors Worry About IBM’s Groupon (GRPN) Lawsuit?

Groupon (GRPN ) made headlines Tuesday after (IBM ) announced a $167 million lawsuit for violation of four of its e-commerce IPs. The tech giant claims that while Amazon (AMZN ) , Facebook (FB ) , and Google (GOOGL ) each pay between $20 million and $50 million for use of these technologies, Groupon has been using them without permission.

Shares of Groupon did not see significant movement on Tuesday and Wednesday as investors were unshaken by the latest in a series of back-and-forth exchanges between the two firms. IBM sued Groupon for the first time in 2016, alleging that it infringed on two server load-reducing systems as well as “single sign-on” technology, which allows consumers to use accounts from platforms such as Facebook (FB ) or Google to sign in to their Groupon account.  

Is IBM Just a Patent Bully?

IBM has won the most US patents in each of the last 25 years, receiving an astounding 9,043 last year alone, according to Bloomberg. The next closest company was Samsung, which received over 3,000 fewer patents in the same period. Groupon lawyer David Hadden told Bloomberg that these patents have fueled “a business that it [IBM] doesn’t talk about in its TV commercials.” And he might be onto something.

In its most recent annual report, IBM highlighted intellectual property as a key value driver, alongside R&D and global markets. In 2017, Big Blue earned nearly $1.47 billion in income related to intellectual property. It also explained that a decline in IP income contributed to an overall decrease in annual revenue.

IBM not only holds a large number of patents but is also not afraid to litigate over them. In recent years, it has sued or collected patent-related fees from Expedia (EXPE ) , Twitter (TWTR ) , Priceline—which is now part of Booking Holdings (BKNG ) — and many others.

IBM’s argument is basically the reason there is patent law. However, it also has a track record of filing a patent for everything it possibly can.

The company came under fire last January when it was granted a patent for an “out-of-office email system,” as crazy as it sounds. IBM ultimately caved to the outrage and dedicated the patent to the public, agreeing not to enforce it.

It is difficult to comment on the nuts and bolts of the specific patents in question in the Groupon suit. However, past behavior reflects the very likely possibility that IBM is simply looking for new avenues for the monetization of its monstrously large patent portfolio.

Groupon’s Health

News broke earlier this month that Groupon is currently on the block and looking for a buyout offer. Management may see this as the best way out given that its shares are down nearly 82% since its November 2011 IPO.

Profitability is a big issue for Groupon, which has seen sideways income movement in the last few years, as we can see below:

While management has been working toward improving figures and cutting losses, the company is not earning much money. Still, it is leveraging new partnerships, including one with Universal Orlando.

Groupon’s key initiative is its transition from a deals company to a marketplace firm. It has also cut down its international exposure from 47 to 15 countries, and now focuses on three main areas: marketing, international, and shopping.

The company beat earnings and revenues estimates last quarter, but saw year-over-year setbacks. Yet, the firm raised its full-year 2018 guidance, and now expects adjusted EBITDA of $280-$290 million compared to the previous projection of $260-$270 million.

Could This Hinder a Potential Groupon Acquisition?

Theoretically, a firm caught in extended litigation may not seem like an inherently attractive buyout target. But given the prolonged battle with IBM, and past trends, the market doesn’t seem to mind. In fact, Groupon ticked up 1.7% to $4.72 per share by the closing bell on Wednesday.

When IBM decided to sue Expedia earlier this year, it was targeting both it and Orbitz, which Expedia acquired in 2014. Big Blue claimed that it had first reached out to Orbitz regarding patent issues in 2011, but was unable to negotiate. Worth noting is that Expedia knew about the situation before deciding to complete the acquisition, meaning that it too did not see it as a big enough threat .

Groupon appears to be poised in a similar position. Some of the patents that IBM is claiming are being violated date back to the early days of the internet, and are the same patents that it has used in previous arguments. Both firms will likely continue to duke it out in court for a few more years before ultimately settling on a much more reasonable figure than the initial $167 million.

Looking Ahead

IBM, like other former tech giants, is in a fight to catch up with the times. In the face of declining revenues, the firm needs as many sources of income as possible.

Groupon, on the other hand, must also tackle its own challenges. Solid recent performance has led to positive earnings estimate revisions for the following quarter, current fiscal year, and following fiscal year. This leaves Groupon sitting at a Zacks Rank #1 (Strong Buy). But while the firm’s new strategic shift and growth initiatives are steps in the right direction, it will take some time before we can determine if they will pay off.

Investors should continue to monitor Groupon’s efforts to boost profitability and any IBM updates because there is still plenty of space for optimism, and some potentially interesting plays to be made over the next few months.

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