SMARTPHONES: Struggling Coolpad Sees Money Bags in Xiaomi

Bottom line: Xiaomi is likely to quietly settle a copyright infringement lawsuit against it by Coolpad, which is opportunistically looking for some hush money before Xiaomi’s IPO and can’t afford a long drawn-out court battle.

Coolpad sues Xiaomi as latter’s IPO draws near

In a move that smells of desperation, down-and-out smartphone maker Coolpad (HKEx: 2369) has filed a lawsuit against the up-and-coming Xiaomi. Anyone with half a brain will know the timing of this lawsuit looks quite suspicious, since Xiaomi is getting ready to make what could be this year’s biggest IPO in the next month or so, likely to raise up to $20 billion.

It’s quite difficult to know if this particular lawsuit has any merit, though we do know that Coolpad was an early hot player in the smartphone space and thus may legitimately hold some intellectual property similar to things that Xiaomi is now using. But the fact of the matter is that Coolpad can hardly afford to wage a long and potentially costly legal battle. Instead, it is probably hoping for a quick settlement to give it some much-needed cash to continue funding its money-losing daily operations.

All that said, let’s take a look at the latest news that comes from a lawsuit disclosed in a filing by Coolpad last week. (Chinese article) There’s probably good reason why people are only discovering this lawsuit now, even though the initial announcement was filed last Friday. That’s because people ceased caring about Coolpad a while ago, following the company’s fall from grace due to some strategic missteps a few years ago in the fast-moving smartphone space.

The announcement says that Coolpad discovered the unspecified violations and informed Xiaomi back in January. But, surprise surprise, Coolpad has learned that Xiaomi continued to produce smartphones that violated its intellectual property. As a result, Coolpad has now formally applied to have the case heard by a court in Shenzhen.

Significantly, the number of Xiaomi models potentially affected by Coolpad’s request is quite large, which is Coolpad’s obvious way of saying a ruling in its favor could throw a huge crimp in Xioami’s business. Specifically, the list includes Xiaomi’s Redmi Note 4X, Mi 6, Mi Max 2, Mi Note 3, and Mi 5X. I’m not a close follower of all of Xiaomi’s various models, but that looks like a somewhat significant list.

Tale of Two Companies

Again, the bigger backdrop to this story is that Coolpad is a company decidedly on the way out, while Xiaomi is moving in exactly the opposite direction. Coolpad’s Hong Kong-listed stock has been suspended for more than a year, while it tries to iron out some accounting differences internally. The company disclosed at one point that it’s massively losing money. It was previously closely tied to the equally down-and-out LeEco, though that relationship appears to have dissolved or be in the process of dissolving.

At the other end of the spectrum is Xiaomi, which last week unveiled its long-awaited IPO prospectus. (previous post) I’ll admit my socks weren’t exactly blown off by this work of art, which revealed the company was losing massive money even though it was posting quite respectable revenue growth of around 67 percent. But investors seem reasonably impressed by the company, and a report I read this week says its valuation could ultimately land in the $60-$80 billion range. If we assume a 20 percent float for the IPO, that would make the fund-raising target in the $15-$20 billion range.

Moving back to the Coolpad story, this particular tale looks a bit like one that happened a few years ago on the eve of the listing for Momo (Nasdaq: MOMO), sometimes likened to the popular US Tinder social networking app. China Internet watchers will recall that just as Momo was about to list, NetEase (Nasdaq: NTES), a former employer of Momo’s founder, came out with some less-than-flattering revelations about the guy. (previous post)

At the end of the day, these kinds of opportunistic moves are probably relatively common when a company is getting ready to make an IPO. Someone with a grudge or other motivation threatens action, though the motivations can differ. In the Momo-NetEase case, the motivation looks more like a personal vendetta aimed at punishing Momo.

In Coolpad’s latest case with Xiaomi the motivation looks much more practical, aimed at squeezing some hush money from Xiaomi on the eve of its IPO. Accordingly, I imagine the two sides will probably quietly settle this matter before the IPO, though I doubt Xiaomi will end up having to pay too much hush money due to the lack of attention that people are giving to this lawsuit and Coolpad in general.


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