Tuesday, June 11, 2013

Acacia Research ( Nasdaq - ACTG ) -- Government Poses New Threat

Acacia Research (ACTG $25.00) has endured regulatory pressure since Barack Obama was elected  in 2008.  The technology industry has been a bedrock supporter of the President.  He's returned the favor in a variety of ways, including legislation designed to provide a degree of protection from patent infringement claims.  The Administration recently announced another round of initiatives aimed at reducing the lawsuit threat.  It also sent a series of bills to Congress.  Acacia's stock price originally fell on the news.  The stock already was down 30% in the wake of last year's regulatory attack.  That legislation actually bolstered Acacia's competitive position, presaging the biggest intake of patent portfolios in the company's history.  The latest government efforts are likely to have a similar effect.  Acacia usually partners with the original patent holders to recoup royalty fees from infringing companies.  Giants like Apple Computer routinely complain when they have to pay those fees, claiming it impairs its creative spirit.  But large companies rarely conduct patent searches when developing new products.  Time to market parameters are too tight.  So they just go ahead and make the products the best way they can.  Frequently, the intellectual property rights of others are stepped on.  Companies like Apple normally wear down small inventors with expensive legal proceedings that extend for years.  Acacia teams up with those kinds of companies and individuals, providing the staying power to go the distance.  That tends to generate reasonable settlements.

Nothing is likely to change under the new regime.  The Obama Administration seems to be targeting frivolous lawsuits, often for small amounts of money that are cheaper to settle than defend in court.  Acacia normally has a high financial threshold when it takes on new accounts.  Small claims aren't worth its time any more.  In fact, many new partners are Fortune 1000 companies with extensive patent portfolios.  Key technologies they retain for themselves.  But a growing number are partnering with Acacia to generate a return on their non core patents.  The company has been expanding beyond the computer and communications area over the past few years, moving into medical, energy, and automotive in particular.  It usually takes 12-18 months to analyze a new portfolio and develop a strategy to monetize it.  Several large programs now are entering the royalty producing stage.

The outlook remains bright.  Rising cash flow probably will be reinvested in additional patent portfolios, dividends, and stock buybacks.

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