In yesterday’s Wall Street Journal, I read the following in an article by Jennifer Smith and Ashby Jones:
The embattled New York law firm Dewey & LeBoeuf LLP has filed for bankruptcy protection, a move that effectively ends what had been at its height a 1,300-lawyer global enterprise and marks one of the largest law-firm failures in U.S. history.
Should we be surprised? America produces more lawyers than the rest of the world combined. In fact our recurring bumper crop of barristers is leading some institutions to offer subsidies for law students to not complete their legal education. And sadly, it’s led other US law firms besides Dewey & LeBoeuf to liquidate their partnerships. In the current soft economy the over-supply of billable hours is depressing the price per billable hour. The free market is at work in the business of law.
So what’s a lawyer to do? Perhaps emigration could work for some of the surplus. After all, the rule of law is essential for the orderly creation, preservation and transfer of wealth and property in free markets. Places like Brazil, Russia, Indonesia and China really could use more law and order to protect their burgeoning capitalist class from the predations of criminals, swindlers and politicians (but bring a gun just in case). It would certainly pave the way to more amicable dealings with the USA via the common language of law. Much of the greatness of America today was built by past generations of immigrants. Perhaps American lawyers are the vanguard of the next emigration cycle. But I doubt that many American lawyers will find solace in this option.
That leaves two other choices- quit lawyering or find something that is under-lawyered. There are many that would applaud the former option but I am not one of them. Instead what this army of disenfranchised lawyers can do is help to turn the universe of intellectual property assets (IP) into new investments. This is the mission of Carthage Intellectual Capital Management. We can show lawyers through the principles of contracts and licensing how to turn IP- patents trademarks and copyrights- into cash for IP owners and royalty revenues for investors, bankers and financial institutions. There’s a real shortage of knowledgeable lawyers for IP based transactions. The money will be quite good and much safer than guns.
Everyone is talking about the need for consumer demand to pull the global economy out of the tank. On this there even appears to be political consensus. The only issues are taxes and government spending. Some want more taxes and more government spending to fund the demand that the unemployed consumers can’t afford. Others want to cut taxes and government spending to leave money in the hands of the remaining employed and encourage them to purchase more things that they don’t need. Is it me, or are the current strategies just a choice of economic suicide by poison or drowning?
As a capitalist I believe in supply and demand, free markets, and rule of law. So if demand isn’t working maybe it’s time to check out the supply source. Is there a demand for better means to supply our markets? You bet- it’s called innovation. And the asset that fuels innovation is intellectual property. So far, it is untouched by the credit markets. More importantly, it is already an existing group of assets.
Innovation is about doing something better. It can be a bucket, a light bulb, a car, solar collector or a shoe. Or it can be a better way to furnish an existing good or service. Innovation builds the demand for new means to supply the innovation. Intellectual property like patents is a first means to build the structure needed to furnish the new means of supply. The investment in structure is usually a multiple of the existing market. The key is to access secure asset based credit to build the new means. Let me again suggest- patents. They are an under recognized and non-capitalized resource representing trillions of dollars in assets. We can access this credit reservoir through the sale and lease mechanics of real property. It’s called the sale license-back of intellectual property. This is not phony demand or stupid consumerism. It’s time to stop being crazy and start being innovative. Really.
Jamie Dimon and Mark Zuckerberg have both made a lot of news recently. Dimon is taking heat for presiding over a series of bad hedges that cost JP Morgan US $5 Billion of its capital. Zuckerberg’s fame and infamy is the Facebook IPO which created US $100 Billion in new stock equity and then proceeded to lose US $16 Billion of it in a week’s worth of public trading. There is a difference however. Facebook (FB trading symbol) is still up around US $85 Billion in new and liquid financial equity. JP Morgan is still down around $US 5 billion in capital losses while some hedging counter parties are up $US 5 Billion for a zero sum change in global equity. This is the difference between derivative finance and origination finance. The former is a zero sum game; the latter is the creation of new capital from un-capitalized assets. The latter is what economies need to grow their way to recovery. So where are those un-capitalized assets yearning to be liquid?
Don’t expect it to be another Facebook any time soon. Because of the poor trading performance of FB social media stocks are taking a real hit and those waiting in the IPO queue will likely have to wait longer- perhaps much longer. But there are other assets that are ready to become liquid now and they are called intellectual properties or IP for short. The IP I am referring to are the millions of patents, trademarks and copyrights that have already been made by businesses, inventors and entrepreneurs with cash invested in the past. Many of these assets have added to the cash spent to create them by the fact that they are helping enterprises make new revenues or by saving the costs to make recurring sales. What we are doing at Carthage Intellectual Capital Management is helping IP owners to originate the cash value of their IP through valuation, monetization and management of IP. The core of our system is the sale license-back of IP. In our world, original thinking is the origin of new capital.
In a down economy, increasing productivity is one remedy for beating the financial blues. But would you believe intellectual property might be a better cure? Productivity, economists tell us, is about getting more output from the same or less input. We typically measure productivity against labor costs, since down economics means lower demand with less use of bought assets. So what makes for more labor productivity? Theory X managers (always popular in recessions-not!) will tell us that the fear of unemployment will wring the sloth out of otherwise un-motivated workers. Theory Y guys will counter that the human need to better their group (i.e. company workforce) will make solutions that do more with less. This creativity impulse is what makes intellectual property (IP).
So who is right? The answer is probably ‘yes’. Theory X managers use hard times to isolate the slackers and boot them out of business. Since slackers weren’t contributing their fair share of the effort in the first place, eliminating them shows the real output of those survivors who minimize their slacking. And pay the survivors less while you’re at it. Theory Y guys usually have more faith in the company HR to keep slackers out in the first place. If the Y guys are right, then eliminating workforce really puts more work on the survivors on a unit labor basis. So you really have to work smarter and the ‘smart’ usually means creating new IP.
Let’s hope the Y guys are more right. IP is property and property is an asset. Getting money for assets is SOP for financing businesses and managing business finance. But who knew that downsizing in hard times might actually create a property –IP- windfall.
The other thing about down economies is losses or to put it more kindly, negative profits. This drags down investor confidence which lowers equity value. More bad news to be sure but curiously there may be an IP upside to this. Now it helps to know accounting and tax regulations to fully appreciate the next part, but common sense works almost as well so here goes. If a business loses money, you can earn back money or sell at a profit with no taxes until you breakeven. That is US tax policy and it makes common sense because if the IRS taxes you when you are already down, it increases the likelihood that you will go out of business. You will then fire your entire workforce and there will be nothing to tax in the future. The government lives off taxes so killing off taxpayers, financially speaking, is a bad idea. So the government let’s you recoup your business losses which lets you keep your workforce employed and you can live another day when you will indeed pay taxes to the IRS.
So what can you do with your tax losses? Well one thing you can do is sell off some of the IP you made in the hard times or even some of the IP you made when times were good. The profits of IP can be 100% of the sale price so that can quickly use your tax losses and earn quick tax-free gains. But you still need to use the IP so how does that work once you’ve sold it. Simple answer – license it back. FYI the royalties you pay on a license-back are 100% tax deductible. Want to learn how to turn your doom times into boom time? Contact us at Carthage Intellectual Capital Management info@CarthageIC.com. Productivity IP can indeed be very profitable.
For patent watchers, the last 12 months have been a truly big year. First was the Nortel bankruptcy auction that fetched nearly US $5 billion for creditors. Second, we witnessed the spectacle of corporate raider Carl Icahn selling off Motorola Mobility (a patent pool actually) for US $12.5 billion. Third, Apple and Samsung are locked in a patent war to see who will control the intelligent telephony platform (i.e. phony computers). Finally, last week Microsoft was the successful bidder at US $1.1 Billion for 800 AOL patents that drive internet business models and processes. So far we see the litigations and liquidations of patents. But where are the sale license-backs? My point exactly.
Now here’s the really weird fact. In financial parlance litigation and liquidation are ‘fear-motivated’ responses to bad circumstances. And ‘fear finance’ usually means selling out of bad situations. But sell-outs tend to depress prices and the exact opposite is happening in our big patent year. The average price of patents in all these event s are going UP in a big way (about 70%/year). And these patents are functionally similar to each other. Go figure.
For those of you hearing about a ‘sale license-back’ for the first time, let me explain. A sale license-back (SLB) is where an investor acquires patents (or other intellectual property for that matter) for a large lump sum and licenses it back to the patent seller in exchange for royalties for the rest of the patents’ legal life. Sound familiar? If any of you have heard of a REIT then you completely get the SLB. A REIT is a pool of real properties that their owners have sold off for a lot of cash and re-leased for their future business use. The REIT uses a sale lease-back to accomplish the same thing financially as a sale license-back. Only the property is different between the REIT and SLB. And also the SLB is patented. Go figure.
Are REIT’s profitable? You bet. Like their financial cousins, the equipment sale lease-backs, a prudently financed lease back arrangement can reliably turn a 25-35% annual IRR on invested capital.
SLB’s are about ‘greed’ finance and I mean that in a most positive way. Greed finance is about acquiring and/or selling into a profitable deal. And SLB’s are financially greedy for both patent owners and investors. So if fear finance has been driving patent prices UP 70% in a year what do you suppose SLB’s will do to patent pricing? Way, way UP! I figure it’s time to get greedy. For more information contact us at info@CarthageIC.com.