TIVO Shares Soar on Buyout Rumor

TiVO Inc. (TIVO - Analyst Report) shares leaped 5.11% and closed at $8.02, following rumors of a buyout by DirecTV (DTV - Analyst Report), according to the Street Insider. However, no concrete information was available from either of the companies.
 
The shares are currently trading near the low of its 52 week range of $7.10 to $18.93. We expect the shares to trade higher on the back of the buyout speculation.
 
DirecTV is an important competitor for TiVO. In the satellite business, DIRECTV has introduced DVR technology including both standard definition and high definition broadcasts that competes against TiVO’s offerings.
 
We believe the acquisition will face antitrust hurdles as it may reduce competition in the DVR market.
 
On a separate note, TiVO, a leading video recording technology company, has been involved in a long running patent infringement dispute (since 2004) over digital video recorders against EchoStar Communications Corp. (SATS - Snapshot Report), the parent company of Dish Network Corp (DISH - Analyst Report).
 
TiVO recently suffered a severe setback, when the US Patent and Trademark Office (PTO) declared in a ruling that the company’s two patent claims over time warp software are invalid.
 
A review was done on request from Dish Network, which contends that the invention of time warp software is not original and the patent office was ignorant about the fact that when the patent was originally approved.
 
TiVO had accused Dish and its parent company EchoStar of infringing TiVO’s time warp software. The software enables users to record one television program while watching another at the same time.
 
A federal appeals court ruled in favor of TiVO as of March 2010.  However, the ruling is at present under review.
 
In the March ruling, the court found Dish and EchoStar guilty of infringement and penalized Dish $300.0 million in damages and contempt sanctions. However, in May 2010, the federal appeals court allowed EchoStar to appeal against the ruling and granted an en banc review.
 
Although disappointed with the PTO ruling, TiVO claimed that the ruling will not have any material impact on the ongoing review process.  TiVO also pressed that it may seek legal options against the ruling, an action that may take at least couple of years to solve.
 
On the other hand, DISH and EchoStar supported the ruling and remain optimistic on the outcome of the review process in the federal court following PTO’s favorable decision.
 
TIVO remains engaged in a number of legal suits, involving AT&T Inc. (T - Analyst Report), Verizon Communications Inc. (VZ - Analyst Report) and Microsoft Corporation (MSFT - Analyst Report).
 
The legal engagements are expected to remain the primary headwind for TiVO. The company reported a net loss of 14.2 million in the first quarter 2010 and despite receiving $400.0 million from various suits; it still has an accumulated deficit of $709.0 million.
 
The patent infringement case against Dish remains an overhang on TiVO’s results and any negative outcome from the ongoing review may impede TiVO’s prospects considerably. These disputes are hurdles for the company’s growth as it will need to record higher litigation expense, which will hurt profits.
 
In our opinion, the stock is riding an impressive wave of success on its new wins and partnerships, which opens up major new markets and licensing opportunities for TiVO.
 
We therefore maintain a Neutral recommendation on the stock.

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