Sunday, March 6, 2011

Acacia Research ( Nasdaq - ACTG ) -- Into the Mainstream

Acacia Research (ACTG $32.00) reported Q4 results that were somewhat below our estimate.  Acacia partners with patent holders to generate royalties on those technologies from infringing corporations, primarily in computer related industries.  The company currently manages more than 180 patent portfolios.  Acacia usually tries to negotiate settlements but it does go to court when deals aren't reached, hiring outside attorneys to try the cases.  Acacia has a fiduciary responsibility to the patent holders it represents.  The company doesn't accept discounted settlements so it can show smooth quarterly earnings comparisons.  Fourth quarter results were slow from a financial reporting perspective because a number of active cases failed to settle.  The volume and total size of the claims Acacia is prosecuting continued to grow, however, and that trend promises to continue.

Acacia signed two "structured agreements" in 2010.  Those deals, rumored to be with Oracle and Microsoft, generated payments of $25 million and $40 million, respectively, which the company split with its various patentholding partners.  The agreements gave those companies the right to use most if not all the patents in Acacia's portfolio for a three year period.  The remainder of Acacia's 2010 revenue was provided mainly by one-off settlements, typically in the $500,000 to $1.0 million range.  The company hopes to sign three more structured agreements in 2011, then four in 2012.  Last week Acacia filed an 8-K with the S.E.C. suggesting it had completed an agreement with Samsung.  Details remain confidential.  But the likelihood of very strong March quarter results appears high.

Growth is likely to be fueled by the electronics industry in 2011.  But Acacia is expanding aggressively into the medical technology area, laying the foundation for greater diversification and faster growth down the line.  The company is starting to reinvest its burgeoning cash flow in its own private patent portfolio, moreover, removing the need to pay a share of its winnings to the original patent holder.  Acacia also formed a hedge fund last year to invest in patents.  Institutional investors are being recruited to invest in what the company hopes will become a new asset class.  Acacia also is beginning to team with large companies, mainly foreign ones to date, to enforce their patent rights.  Many companies own patents that aren't central to their business but could generate royalties.

We estimate fully taxed 2011 earnings will reach $1.20 a share.  Annual growth of 25%-40$% appears sustainable well into the decade.

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