Tuesday, September 27, 2011

Acacia Research ( Nasadaq - ACTG ) -- Inventory of Patents keeps Expanding

Acacia Research (ACTG $40.00) appears on track to produce excellent on target Q3 results.  Financial results are hard to predict because the company earns its money by enforcing patent rights.  Those settlements happen when they happen.  Estimating quarterly results is impossible.  But when looking at longer periods financial comparisons become more meaningful.  Measuring the 12 months ended September 2011 against the prior twelve months, a good showing is likely.  If Acacia consummates a "structured" agreement with a large corporation during the last three days of the quarter, a fabulous report would be likely.  Patent values have escalated over the last year.  So the value of a structured deal would likely go up commensurately.  To date Acacia has signed three structured contracts.  Those deals give the counter party (Oracle, Microsoft, and Samsung so far) free use of all the company's patents for a three year period in exchange for a fixed fee.  Given the recent upswing in patent valuations, those buyers probably got a 50% discount compared with today's valuations.

Acacia's stock might slip if the company doesn't complete a structured deal before the end of Q3.  Back when patent prices were lower Acacia said it planned to sign three structured deals in 2011 and four in 2012.  Samsung was completed in Q1, and no big deals were completed in Q2.  Most investors seem to want one in Q3 and another in Q4.  Our advice is to buy the stock if it sells off.  We think it's unlikely Acacia will sign a deal at the last second to "make the quarter."  That would create a bad precedent and diminish the company's income potential in future periods.  A big rebound in the shares could develop in Q4, particularly if Acacia were to sign two deals, both worth more than $100 million. 

Meantime, the company is continuing to build its patent portfolio.  Acacia added a valuable group of semiconductor patents today, going partners with a major chip producer.  Negotiations are underway with dozens of additional companies, most of which never would have considered monetizing intellectual property a few years ago.  Interest is especially keen at companies owned by private equity and other activist investors.  Many of them view Acacia has a proven commodity that's able to generate cash in a reliable and timely fashion.

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