Acacia Research (ACTG) appears on track to produce excellent on target Q2 results. The company is the leading provider of patent monetization services. Acacia got its start working with small inventors who didn't have the resources to enforce their rights against large corporations. Acacia provided the legal talent and the financial muscle to reach the finish line. In exchange, it earned 50% of the winnings. (That's just an average. Every deal is unique.) Over the years Acacia began to win on a regular basis in its core field, the technology and communications industries. Those companies are under tremendous competitive pressure and don't have time to run patent searches when they develop new products. So they inevitably break the law. In the old days they'd just stare down a university professor who held a patent they were violating. Once Acacia arrived on the scene there wasn't any more getting out the back Jack. Those companies were on the hook and Acacia made them pay.
In 2010 and 2011 Acacia signed three "structured agreements" with Oracle (ORCL), Microsoft (MSFT), and Samsung. Those were big money deals that gave the companies three years of free access to all of Acacia's patents, including the ones it had partners for. The company began using that money to purchase patent portfolios for its own account. It raised capital in the stock market, some of which was spent on patent acquisitions, as well. Last year patent valuations skyrocketed in the wake of several high-profile deals. Those were billion dollar transactions that, while they didn't have anything to do with the company directly, increased the value of its patent portfolio. It also got the Fortune 500 thinking. Patents became a new asset class. Those multinationals had tons of patents, some of which were non core. So a market began to develop.
In 2012 patent asset values have stabilized. The volume of settlements and transactions had declined during the run-up because the sellers were afraid they'd sell low and the buyers were afraid they'd buy high. Now that values are better established volume has begun to pick up again. Acacia took a low-key approach itself during the surge. It hasn't signed a "structured transaction" in more than a year. That situation probably is coming to an end.
Some very large deals are likely to be signed this year. It takes two to tango so it's impossible to predict how much money Acacia will earn in 2012. We think it definitely will be higher than Wall Steet's consensus estimate. Our figures assume that the biggest targets, like Apple (AAPL), will continue to hope against hope they can rope a dope the legal system or figure some other escape route. So the massive payouts may not emerge for another year or two. But a strong performance is likely, nonetheless.
The long-term outlook remains bright. Patent rights probably will become more of a standardized market where a lot of the negotiations take place behind a computer screen. That will reduce transaction costs. Acacia already has brought down legal expenses over the past few years by negotiating more out-of-court settlements. The industry itself is likely to keep growing, moreover, because the largest patent holders also are the biggest infringers. If the transaction costs are narrowed, there won't be any reason not to figure out exactly who owes what to who. Acacia will make the market. And it will trade for its own account. These shares have a lot of upside potential.
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Disclosure: I am long ACTG.