Here is something you may have missed if your eyes have been focused on the gyrations in bond and equity markets as euroland crises have come, gone and come again. The S&P 500 telecoms and IT index, the bellwether of digital stocks, has climbed 120 per cent from its 2009 low.
All of us who lived through the exuberance of the tech bubble of 2000, when all you has to do was add ‘.com’ to a company name and watch the fireworks, have a right to be sceptical about this latter-day boom. The rise and rise of Apple to become the most valuable firm in the world, with a market capitalisation of more than $600 billion, has led some analysts to quote the S&P minus Apple to get a better perspective.
However, as a recent traveller to the San Francisco Bay area which takes in Palo Alto and Silicon Valley, I could not but be impressed by the high levels of innovation, the cult of the patent and the constant creation of new value. Firms like Autodesk — pioneers in 3D printing, which can reproduce engine parts in your office — and Salesforce.com, winners in ‘cloud’ computing software and storage, dominate the skyline of San Francisco. Further south, social media players such as Facebook and LinkedIn dominate. What all of these companies have in common is a profound belief in research, new applications and patents.
Microsoft, IBM, Hewlett Packard and their ilk, the establishment of the sector, pay dividends to shareholders. But the newer players rarely do so, preferring to reinvest rather than distribute income and to reward investors by issuing shares because that also rewards skilled employees who are largely paid in equity, making them ever richer and more loyal to the cause.
A key manifestation of the rich spoils of R&D can be observed in America’s patent wars. Industry leaders have been rushing to court to protect what they see as pirated intellectual property in cases such as Yahoo versus Facebook, Oracle versus Google and Apple versus Motorola. There’s a certain irony in the fact that many of these firms live off content, from music to film, books and games, that has been filched by pirates from the creative industries. But the desire to own and nurture intellectual property has also triggered a mini takeover boom. Rather than returning cash to shareholders, the Microsofts and Googles prefer to sit on multi-billion-dollar war chests. That means that they can make quite large takeovers without causing ripples — though one which attracted attention recently was the purchase of the photo-sharing application Instagram by Facebook for $1 billion.
Just months earlier, when it was refinanced, Instagram had been priced at $20 million. The deal worried investors because it suggested that Facebook, the darling of the IPO sector, might have to dish out further billion-dollar dollops to prevent other players from colonising its turf.
Certainly compared with other deals done in the sector it does not seem the greatest of bargains. Microsoft, for instance, paid $1.1 billion (on the same day) to AOL for 800 patents related to advertising, search, mapping and multimedia. Apple and a number of other firms shelled out $4.5 billion for 6,000 patents owned by Nortel, a telecoms firm which hit hard times. And Google dug deep to find $12.5 billion for Motorola Mobility and its extraordinarily rich cache of 17,000 patents, including uses for mobile devices, wireless networking and security.
The UK has not been immune from this fashion for cash-rich firms to buy up technology and patents. Most notably Hewlett Packard, a struggling giant of Silicon Valley, sought to renew itself by spending $12 billion on Cambridge software pioneer Autonomy, which designs many of the most sophisticated chips in modern mobile devices. That was a good deal for Autonomy investors and founder Mike Lynch, but maybe not for Britain’s high-tech future.
On a lesser stage, two other British tech companies have joined the exodus to the USA. The financial and banking software group Misys was sold to San Francisco private tech investor Vista — which vowed to keep the business in Britain but is moving its headquarters to the West Coast. Similarly, Umeco, which makes light, high-tech materials for the civilian aerospace, defence and car industries, looks set to be absorbed by the US firm Cytec unless one of its global peers — such as Japan’s Toray — decides to get involved.
The point of these US takeovers of UK firms is that they are as much about buying technology, R&D expertise and patents as they are about immediately acquiring new streams of income. Britain is particularly good at incubating such innovation because of the research capacity at top universities such as Cambridge, Oxford, Imperial College and UCL.
A direct product of this invention pipeline is Oxford Instruments, one of the first public companies to come out of the university incubator, as long ago as 1983. It is a leader in making equipment that can fabricate, analyse and manipulate matter at the atomic and molecular level. This skill has been built around its own intellectual property. Broker Liberum Capital thinks it is capable of doubling its profits over the next three years because of its mastery of nanotechnology.
Another home-grown enterprise brimming with in-demand intellectual property is Imagination Technologies — which I hold. It has been a direct beneficiary of the iPad revolution, providing much of the chip technology used by Apple on its screens. It is probably best known for its consumer technology division Pure, a pioneer in digital radio, but its real future value lies in chips used for ever more advanced screens. Including Apple it has 125 active chip partners, and analysts see it having the potential to cash in on smart TVs as well as next-generation PCs and tablets.
Several brokers, including the investment bank Jefferies, have recently raised their price targets for these stocks. It may be disagreeable to contemplate, but the embedded intellectual property and unexploited patents in the likes of Oxford Instruments and Imagination could make them highly attractive to acquisitive American tech behemoths.
One way or another, the scale of the patents wars and the high prices recently paid to acquire intellectual property suggest that the tech bull market, on both sides of the Atlantic, still has some way to run.
Alex Brummer is City Editor of the Daily Mail and the author of Britain for Sale.