Newport Beach-based Acacia Research Corp. is shifting its strategy as the patent licensing market continues to gain acceptance as an asset class.
Acacia grew by licensing technologies on behalf of companies and reaching court settlements with patent infringers. That took it from its startup days in the early 1990s through its ascent to industry leader today.
Now a wave of recent high-profile patent sales—driven by companies looking to wring revenue from legacies of research and development—has Acacia looking to buy patents outright for future growth, according to company watchers.
Its $160 million purchase of Adaptix Inc. in January offers an indicator of future plans. The deal for the Dallas-area company bolstered Acacia’s portfolio of patents on 4G wireless technology, adding revenue immediately and boosting margins, according to analysts.
Acacia management inferred a margin of 95% or higher on licenses for the Adaptix technology, analysts said. That’s likely because the purchase of the patents means it won’t have to share revenue and is less likely to engage in litigation.
Acacia already controlled more than 10 patent portfolios before it bought Adaptix.
Last week it raised $225 million through a stock sale to private investors and is eyeing similar deals, with “three to four targets,” according to Jonathon Skeels, a research analyst at Davenport & Co. in Richmond, Va.
“We believe Acacia is in the midst of a major expansion of its business, with outright patent acquisitions driving licensing activity, increasing margins and accelerating the growth of the business,” he said.
A push to make money on legacy technologies combined with a recent spate of patent sales by big technology companies has opened up the market for buyers, according to Rob Stewart, an Acacia spokesperson.
• Headquarters: Newport Beach
• Business: patent licensing
• Founded: 1992
• Ticker symbol: ACTG (Nasdaq)
• Market value: about $1.7 billion
• Notable: raised $225 million for acquisitions of companies with extensive patent portfolios
“Tremendous Opportunity”
“We see a tremendous opportunity in deal flow and intellectual property coming to the marketplace,” he said. “We’re seeing companies doing more and more with patents and monetizing them.”
Recent developments on the patent landscape include:
• Eastman Kodak Co. putting its portfolio of digital camera patents, which it values at $2.2 billion to $2.5 billion, on the selling block as part of a Chapter 11 bankruptcy.
• Google Inc. buying Motorola Mobility Holdings Inc. in August for $12.5 billion. The former Motorola mobile devices division brought Google more than 17,000 patents as the company looks to take on Apple Inc. and other smart phone makers.
• Apple, Microsoft Corp. and Research In Motion Ltd. leading a group in July that purchased a patent portfolio from Nortel Networks Corp. for $4.5 billion in cash, outbidding Google in the process.
Davenport analysts believe the “vast majority” of Acacia’s first-quarter revenue will be generated through Adaptix licenses with Seoul, Korea-based Samsung Electronics Co. and Microsoft.
Margins
Higher margins could become frequent for Acacia if it puts the recently raised $225 million toward the outright purchases of patents. Most of its revenue to date has come from deals struck on behalf of patent holders.
In either case Acacia typically makes money when it finds companies infringing on patents and strikes a licensing deal or sues.
It splits sales, licensing fees and court settlements with the patent holders it represents.
“Based on the respective market shares of Microsoft and Samsung in the smartphone market, we believe the total licensing opportunity from Adaptix could exceed $300 million from just handsets,” Skeels wrote in a note to investors.
Acacia saw record revenue in 2011 of $184.7 million, up 40% from a year earlier.
Adjusted profits hit $43.3 million, down nearly 10% from a year ago.
