Richard Lloyd

In February this blog broke the story that John Amster had stepped down as CEO of RPX in one of the patent market’s biggest shocks so far this year. According to a statement from the company which confirmed his exit, a disagreement between Amster and RPX’s board of directors over the former CEO’s desire to take the business private had prompted his departure. As this blog also then reported, there has been private equity interest in the business but not enough to make the board talk to bidders.

Amster had clearly become frustrated by the company’s languishing share price, which had seemingly become stalled around the $10 mark (well down from its IPO price of $19). However since his departure and the exit of a number of other senior executives, investors have seemingly decided to place some faith in the new management team, led by former general counsel Marty Roberts, boosting the share price to around $14 and a market cap of just under $700 million. Any private equity bid might have been expected to come in at around $750 million, but with the company’s current valuation that wouldn’t be enough of a premium for shareholders.

The rise in the share price has come despite no significant improvement in the company’s fortunes. The first quarter results, announced in May, were solid but not spectacular with the performance of RPX’s Inventus discovery business perhaps the one standout.

But also disclosed in the Q1 numbers was the fact that renewal rates in RPX’s core patent aggregation business had dropped below 90%. The company had forecast a likely drop so it did not surprise the market, but it should nonetheless set off alarm bells over long-term growth prospects for RPX’s core business. The real challenge is not convincing the biggest tech companies to continue to subscribe - for them RPX’s fees are still justifiable even if patent litigation in the US is falling and the NPE sector is going through a pronounced slump - but persuading new companies to sign up. If they have not done so already, what is the urgency in doing so now given the decline in suits and the tougher conditions for patent assertion that exist in the US?

To keep growing its patent licensing core, the company needs to convince more mid-sized businesses, many outside of the tech sector, that the diminished NPE threat is still worth paying out for. At the same time it needs to hope that its Inventus business can continue its Q1 performance - but in the competitive, typically low-margin legal technology space that’s far from guaranteed.   

Whether the Inventus acquisition pays off or not, RPX’s fortunes remain closely tied to its ability to diversify beyond its patent risk-mitigation origins. Amster knew that, hence the move into discovery services and an attempt to position the business as a legal technology player. The market has now clearly given the new management team time to prove that it can use its still cash generative patent licensing arm to make further acquisitions and develop new lines of business. While that remains the case the chances of a private equity buyout for the patent licensing pioneer appear to be fading.