IPO Delayed, Liquidnet Faces Patent Issues
Initial valuation may overlook patent risks
December 15, 2008
When Liquidnet Holdings announced in July that it was planning an initial public offering, expectations were high, even in a difficult environment. After all, the institutional brokerage had built a stellar reputation with its buy-side-only block trading platform. But the virtually frozen IPO market has caused at least a temporary delay, which may give investors time to consider impending decisions in a patent dispute that could have a major effect on Liquidnet's business.
A Liquidnet spokesperson said last week that the firm will continue to refresh its S-1 registration statement on a quarterly basis, "in case we decide to pursue the offering." There is "no definitive timetable" for the IPO, he added. That statement came after CEO Seth Merrin was quoted in several news outlets saying that Liquidnet's public listing, originally slated for this quarter, would likely be postponed until 2010.
This summer, Liquidnet cited $500 million as a target for the proceeds. That amount, depending on the stake sold to the public, could have given it a much higher value than the $1.3 billion market capitalization of rival Investment Technology Group (ITG). When ownership is concentrated in a few hands, selling stakes as small as 10 percent is not uncommon, and a successful sale of that size would have valued Liquidnet at $5 billion. About 75 percent of Liquidnet is owned by seven parties--Merrin holds 30 percent.
Since July, there has been a severe drought of new shares entering the market, which may mean that New York-based Liquidnet will have difficulty reaching such lofty valuations for some time. But aside from market dynamics, there are other issues that could affect Liquidnet's core trading operations.
Liquidnet on Nov. 13 filed an updated S-1 statement, providing material information about the firm's business. The document, in its discussion of current legal and administrative proceedings, details ongoing litigation with ITG and Boston-based brokerage Pulse Trading, which Liquidnet alleges have infringed on the patent supporting its blotter-scraping system.
The patent was granted in November 2006 to Liquidnet, which one week later sued agency brokerage ITG--also a provider of block-order matching systems--for infringement. New York-based ITG later countersued, claiming that Liquidnet's patent was invalid and unenforceable, and demanded $200 million in damages for the defendant's "tortuous interference" in its prospective business relations. Liquidnet brought similar claims against Pulse Trading in July 2007. Both actions have been consolidated in the U.S. District Court for the Southern District of New York.
Liquidnet's S-1 notes that although the result of the litigation, currently in the discovery process, is uncertain, the final outcome "will not have a material adverse effect on our business, financial condition or operating results or cash flows."
Holway's System
Central to ITG's countersuit is the allegation that Liquidnet's infringement claim is invalid because its patent is based on an earlier trading system created by Richard Holway. That system in 1999 began operating as Harborside, a subsidiary of New York-based Jefferies & Co. Holway submitted a provisional application for a patent in May 1999 and a non-provisional one in May 2000, 11 months before Merrin filed his own non-provisional application. In January 2007, Holway's application was "allowed," meaning it passed muster with the U.S. Patent & Trademark Office (PTO) examiner. But before the patent could be issued, previously unexamined information about an earlier system emerged and the application was withdrawn.
