In 2010 Acacia agreed to "structured settlements" with Oracle and Microsoft. Those deals provided those giants with licenses to all of the patents under Acacia's control, plus all the new ones it would bring in, for a three year period. Oracle paid $25 million; Microsoft, $40 million. In Q1 Samsung paid the company $45 million under a similar arrangement. A portion of that money was paid to the company's partners. Even so, earnings jumped dramatically in each of the quarters those deals were signed. Patent values have escalated in 2011, fueled by several major transfers in the smart phone space. That surge has made it more difficult for Acacia to reach agreements on additional structured settlements. Infringing companies have been waiting for the dust to settle before committing such large amounts of capital.
The rise in patent values also has prompted many corporations to figure out ways of monetizing their own patent portfolios. Acacia is negotiating with several companies, including the three it already made structured deals with, to license large swaths of their patent portfolios. The arrangement could offset some or all of the money they're paying in infringement cases. It also will hide the originating company's identity when prosecuting those rights, allowing it to do keep doing business without acrimony. Judicial pressure might be mitigated, as well. Acacia probably won't be accused of anti-competitive behavior.
The lull in signing new structured deals has caused the stock price to retreat over the past few months. Those transactions provide immediate earnings boosts which investors thrive on. Income from stand alone settlements has been advancing sharply over the past two quarters, though. And Q4 comparisons should be positive even if no structured deals are consummated. Our estimates assume that scenario. They are unchanged. Acacia indicates it is continuing to pursue structured transactions. It also is bringing in rafts of new patents which might take 1-2 years to prepare, but promise to bolster income growth in the future. The company additionally is looking to buy key patents in partnership with major companies, giving them a license and then suing everyone else. That might keep the partner off the judicial radar screen. Earnings could follow a number of paths to sharply higher levels over the next several years. Our 2-3 year target price is unchanged at $100 a share.
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