Google, Microsoft Eye Tivo

After the $500 million settlement with Dish Network Corp. (DISH - Analyst Report) and EchoStar Corp. (SATS), Tivo Inc. (TIVO - Analyst Report) is on the take over radar of multiple companies such as Google Inc. (GOOG - Analyst Report), Microsoft Corp. (MSFT - Analyst Report) and Rovi Corp. (ROVI - Snapshot Report), as reported by Bloomberg.

Bloomberg has estimated that Tivo could be sold at a price of $20 per share, indicating a market cap of $2.41 billion.

In its last quarter, Tivo had settled a seven-year-long patent dispute with Dish and EchoStar over TiVo’s time warp technology. Now, according to the terms of the settlement, TiVo will allow DISH Network and EchoStar to use its time warp patent, in return for a $500.0 million payment that Tivo will receive from the two. This amount includes an initial payment of $300.0 million, while the remaining $200.0 million is to be distributed in six equal annual installments between 2012 and 2017.

EchoStar also granted a license to TiVo under DVR-related patents for TiVo-branded, co-branded and ingredient-branded products. Additionally, TiVo will help DISH Network promote the Blockbuster digital video service going forward.

TiVo agreed to dismiss all pending litigations and dissolve all injunctions against DISH Network and EchoStar.

Incidentally, one of its possible suitors, Microsoft, is fighting a lawsuit against Tivo, and the latter recently won a couple of stay orders against Microsoft. Apparently, Microsoft would rather take over the company than lose the legal dispute and shell out a hefty price for it.

Google, on the other hand, is trying to get traction in the household with its Google TV, which lets users search online video and other content on their TV screens. Therefore, TiVo’s television search capability would be an added advantage for Google.

Additionally, Tivo is likely to turn to profits as the settlement of patent lawsuits would decrease its legal expenses considerably and provide a recurring revenue stream over the long term.

We believe that the latest settlement has enhanced TiVo’s reputation, justifying the aggression with which it has been defending its intellectual property.

However, the company continues to fight patent litigation issues against Microsoft, AT&T Inc. (T - Analyst Report) and Verizon Communications Inc. (VZ - Analyst Report). Going forward, any negative outcome from these lawsuits will have a negative impact on the shares. If Tivo can successfully defend its patents, it would bolster the company in our view.

TiVo remains committed to developing new technologies and is spending handsomely on research and development (R&D), which is expected to increase by $25.0 million to $30.0 million for fiscal year 2012 ($81.6 million in 2011).

The increased expenses will no doubt impact earnings, unless there is a corresponding pickup in sales. We therefore prefer to take a wait-and-watch approach for the coming quarters.

We have a Neutral recommendation on TiVo over the long term (6-12 months). Currently, TiVo has a Zacks #2 Rank, which implies a Buy rating in the short-term (1-3 months).