Publicly traded Acacia Research (NASDAQ: ACTG) invests shareholder money into patent assets, playing a key role in the technology creation life-cycle: making sure the original creators of the technology get paid for their work. Recently, Acacia invested a sizable portion of its cash ($160 MM) into a company called ADAPTIX, garnering a small but potent patent portfolio of 4G handset and infrastructure technology. Less than a week later, Acacia filed suit against Android handset makers, carriers and infrastructure providers, and Microsoft and Samsung were announced as licensees.
The timing of the Microsoft/Samsung announcement suggested that terms had already been largely negotiated prior to Acacia’s purchase. In addition, even if Microsoft and Samsung are not sponsoring Acacia as a privateer enforcer of the ADAPTIX portfolio, Acacia’s confidence in making such a large purchase was undoubtedly driven by this pre-existing licensing deal. According to CEO Paul Ryan, Acacia already recognized record earnings only one month into the quarter, reporting revenues of $75 MM in January alone. Further, Ryan specifically attributed the Microsoft and Samsung deal to the revenue boost.
Prior to January 2012, Acacia received, on average, revenues of about $15-16 MM per month in 2011, a slight drop from previous record highs in 2010 of around $20 MM per month. Based on this data, and Ryan’s comments above, the collective contribution of Microsoft and Samsung may have been as high as $40-65 MM. A payment this magnitude puts Acacia almost halfway toward recovering its investment, and only a week after laying out the cash in the first place. Assuming they could keep up this pace (which, admittedly, is a bit like predicting an opening day home run hitter will set a new single-season record at 162), Acacia could recover its full investment by the time spring training is over, and double its money in time for the World Series.
While that prediction may be a tad extreme, the point remains that quick returns attract savvy investors to intellectual property. Further, prudent investors watch for deals like ADAPTIX that offer the possibility (and in this case, likely, the guarantee) of immediate revenue. Acacia most likely took a calculated risk in favoring ADAPTIX over another 4G portfolio available on the market at the time: InterDigital. Suspiciously, InterDigital pulled its portfolio off the market a few days before Acacia announced its acquisition of ADAPTIX. The similarity in the technologies, and the amount of cash laid out both suggest Acacia as a likely suitor for InterDigital’s wireless portfolio. Once both storylines broke, Ryan followed up with an email to the media offering this explanation:
What most people do not understand is the law of diminishing returns when applied to IP portfolios. While acquiring vast portfolios may look great from the outside; the value of incremental patents is dramatically diminished, making the ability to monetize these assets extremely difficult.
This is precisely why Acacia’s business model has excelled and evolved throughout the company’s history. I am quite sure InterDigital will remain in an aggressive licensing mode, but these deals will most likely be handled via third parties or on a smaller, more targeted scale.
Indeed, the ADAPTIX portfolio shares some characteristics that suggest Acacia examined both properties. For one thing, ADAPTIX’s 15 patent family collection, with 200 or so worldwide patents is far smaller than InterDigital’s 20,000 patent arsenal. In addition, InterDigital’s portfolio is heavily laden with pre-existing licenses, while ADAPTIX was unencumbered prior to the Microsoft/Samsung deal, according to a story from IAM Magazine’s Joff Wild. Finally, an analyst report cited by Wild claims that the acquisition of ADAPTIX was a “cash only” deal, meaning Acacia retains about 95% of what it earns in licensing fees. Conversely, InterDigital may have insisted on “back-end” participation in any future licensing of its portfolio, cutting into the purchaser’s profit margin.
Wild goes on to note Ryan’s prediction of Acacia’s “bright future” from a couple of years back. Indeed, the patent investment firm has delivered on that promise. Between 2006-09, Acacia’s monthly revenues fluctuated annually between about $3-5 MM. Since 2010, monthly revenues have averaged well over $10 MM, and Acacia just set a quarterly earnings record only a third of the way into the quarter. While the licensing pace will undoubtedly slow down, and revenue is likely to be highly volatile, Acacia’s quarterly earnings reports will be closely watched for years to come. Ultimately, only time will tell whether Acacia’s calculated risk was the right one.