Litigate, Liquidate or License-Back?

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.

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