Friday, October 19, 2012

Acacia Research ( Nasdaq - ACTG ) -- Speed Slows Down the Game

Acacia Research (ACTG $25.00) reported lower than expected Q3 results.  Quarterly results are an important data point in the company's performance.  But they don't correlate on a year to basis.  Acacia is the leading provider of intellectual property monetization services.  Some people call it a patent troll.  It joins forces with patent holders to force infringers to pay up, according to the law.  In the past large companies would string inventors along with an endless series legal maneuvers, forcing them to give up because they ran out of money.  Acacia teamed up with the small fry, usually going 50-50 with them.  Acacia had the resources to keep going and force a fair settlement. 

The winner take all economy has made intellectual property increasingly valuable.  Acacia currently is under political pressure, created by large companies that don't want to pay.  A variety of laws are under consideration in the U.S. and Europe to reduce those liabilities, mainly by creating a new class of IP called "standards based" patents.  Those are inventions that everybody in an industry would like to use.  It's impossible to tell where this might lead.  But it seems likely that politicians here and abroad have stumbled upon a gravy train when it comes to the subject.  The big companies don't have a leg to stand on.  But they may win a concession here and there from the various legislators, to keep the campaign contributions coming.

Legislative uncertainty has slowed Acacia's deal flow.  The company also has been adding aggressively to its patent portfolio over the past year, making potential settlements more complex.  In the past Acacia would threaten to sue an infringer with a single patent, and they'd work it out.  Now Acacia has multiple portfolios under its control.  The targets it's talking with are interested in working out a package deal.  How much everything's worth, that comes back to Barney Frank.  There's an election coming up.  Rep. Frank is retiring.  There's a lot of stuff going on.  And there's a lot of money on the line.

The company is going for it.  On its recent earnings conference call several analysts pestered Acacia's management about repurchasing stock or issuing special cash dividends.  The company said, "We feel your pain.  But we're investing our cash in the business."  That's as bullish a statement as you can get.  The loser companies buy back stock. 

This is a great company.  We've reduced our estimates.  From what we can figure, though, Acacia is negotiating with at least 50 companies that could generate $50 million or more in revenues over the next 2-3 years.  Maybe that wiill prove optimistic.  Let's face it, Congress is a crooked place.  But it's on the level, too.  Getting paid a fair price for your invention is the American Way.  Multiply it out.  And remember those deals will come up for renewal in 3 years, creating a decent recurring revenue stream.  And unlike most companies, Acacia has the ability to reinvest its cash flow at a superior rate of return.  These shares have a lot of upside potential.

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