NPE and operating company to merge in new-style structure that could suit changing times 07 Jun 13
What looks to be a new kind of IP monetisation entity will become a reality next month should a shareholder vote scheduled for 20th June approve a proposed merger between NPE Lexington Technology Group and the NASDAQ-quoted speciality packager and authentication provider DSS Inc. As far as I can tell, this would be the first merger between an NPE and an operating company.
The new outfit will take the DSS moniker and earlier this week I spoke to LTG’s Jeff Ronaldi and Peter Hardigan, who will become CEO and COO respectively of the business should the deal get the go-ahead. DSS, they explained, is a company focused on brand protection and securing documents (its technology goes into US Social Security cards, issued to virtually every US citizen). But although it has annual sales of around $20 million and a portfolio of eight patents (some of which it is currently enforcing), as well as a number of applications, it has not made as much of its IP as it could have done – which is no real surprise given that like many other busnesses it lacks the expertise needed to do this. Post-merger that expertise will be inside the company, with bells on.
Ronaldi, who joined LTG in November 2012, has generated over $150 million of patent-based returns for a variety of businesses over the past 20 years and also helped to take UUNET (now Verizon) public. For his part, Hardigan has been CFO of IP Navigation Group, managed IP investments for Charles River Associates and was a patent licensing manager at Columbia University. Warren Hurwitz, who co-founded Altitude Capital Partners, is a member of the LTG board of directors. LTG is the owner of Bascom Research, which is currently asserting a series of social networking patents against companies such as Facebook, LinkedIn and Novell.
Should the tie-up be approved, the plan is to improve DSS’s current licensing strategy and to build its portfolio, both organically and via acquisitions. The patents will be used not only to enhance DSS’s own offerings, but to expand its monetisation programme too. However, that is not the end of it: DSS will also look to buy stakes in other companies which it feels own patents that have monetisation potential; with any proceeds generated from the IP expertise DSS brings to the table being used to boost profitability and/or to help bring products to market.
Effectively the new DSS will be a hybrid business. On the one hand an operating company enjoying strong growth (28% last year) and heading towards break-even; on the other, an IP fund focused on patent acquisition and patent-based equity investments. In the short-term, DSS will use private capital to make its plays and when appropriate will leverage its balance sheet. Current cash on hand is adequate for most investments, I am told, but if necessary DSS can raise capital by issuing equity. The company also can use its stock for acquisitions. The aim is that within a year DSS will be managing between seven and 10 investments, so providing the diversified offering that Ronaldi and Hardigan hope will deliver sustained success and a strong level of shareholder comfort.
The dual nature of the business should, the pair believe, help the new DSS avoid some of the extreme stock-price volatility that is often the hallmark of publicly-quoted IP companies (PIPCOs), where one event – such as the outcome of a Markman hearing or a jury decision - can drive a share price either sharply up or down. DSS owns physical assets and can offer a degree of transparency that most PIPCOs would find hard to match. Over time, they say, this should help to ensure the stability that long-term investors are looking for.
When you get down to it, what we have here is an NPE taking over an operating company. While those that run LTG, and will run DSS if things go to plan, have all the IP monetisation experience in the world, the challenge for them in the future will be to apply that within an operating company environment. Without careful judgement, that may be easier said than done given the issues that an operating company has to deal with that are not typically of prime concern for NPEs (managing customer relationships, for example).
However, if Ronaldi, Hardigan et al do get it right the potential synergies are exciting: a proven operating company revenue stream; experienced IP management; better access to capital markets; higher market value; and new opportunities to acquire patents both for monetisation purposes and for competitive and financial value. Should all the pieces fall into place, investors can expect higher rates of return from an operating company with high-quality IP and a management team that knows how to use it.
And as troll/NPE/PAE business models come under increasing scrutiny, the way DSS is structured should also help to protect its ability to enforce its own rights, as well as those of companies in which it has a stake, with the entirety of the tools that the US patent litigation system has to offer - injunctions, the ITC and so on. All of which makes the success or otherwise of the new company something that NPEs in the US, as well as those looking to create or invest in IP-based businesses, should be keeping a very close eye on.
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