Richard Lloyd

It may be a depressed market for patent assets generally, but Finjan’s recent deal with IBM seemingly bucks that trend. Big Blue has agreed to hand over 25 grants and 16 applications to the cyber security business and in return will receive $2 million upfront and a further $6.5 million over a five-year period – that’s an overall price per patent of more than $200,000, which is a decent return by any standard.

In terms of size, though, the transaction pales in comparison with the 4,000 former Kodak patents that Dominion Harbor picked up from Intellectual Ventures or the stockpile of 6,000 Nokia assets (and before that Alcatel Lucent) that is currently being hawked in the market.

Another way that the Finjan/IBM deal stands out is that it sees a public IP company (PIPCO) buying a portfolio at a time when many of its peers are beating a hasty retreat from the sector or nursing perilously depressed share prices. Earlier this month Marathon Patent Group, which for a couple of years looked like one of the better positioned businesses in the sector, handed over a bunch of assets to Fortress and announced that its CEO Doug Croxall would be leaving. It’s also unusual to see IBM selling to a PIPCO – at least in public.

Armed with the IBM patents Finjan is forming a new subsidiary Finjan Blue, that will look to license the assets either separately or as part of deals done by Finjan Inc, the company’s legacy licensing arm. The deal effectively doubles Finjan’s existing portfolio of 28 US grants owned by Finjan Inc.

But this is not just a licensing play by the cyber security NPE. While it derives around 90% of its revenues from licensing, Finjan also has a product arm, Finjan Mobile, which could also stand to benefit from the inventions covered by the assets. “Yes there’s a licensing opportunity from the Finjan Blue portfolio but there’s also a technology development opportunity and I think it’s safe to say that that will be enabled over time through products that you’ll see at Finjan Mobile,” the company’s CEO Phil Hartstein explained. “This deal augments our licensing business but also adds value to the product side.”

With around $40 million on its balance sheet thanks, in part, to a series of capital raisings, the company has the resources to invest in all parts of its business and Hartstein insisted that investing in the product side remained a strong focus for the company. He revealed that the deal might be a prelude to an expanded relationship with IBM which, he said, “had definitely been discussed”.

The new patents also give Finjan the opportunity to replenish an ageing portfolio. “We’ve been at the licensing business for 12 years now and those are patents that were created when the original technology was developed,” Hartstein said. “So at some point the opportunity to expand the licensing business based on Finjan Inc’s own assets starts to diminish. So it’s important to find and explore opportunities to expand our depth in cyber security.”

According to Finjan’s analysis it has licensed 25% of the market opportunity available to it and is engaged in one way or another with a further 25% of the market. The addition of the Finjan Blue patents, Hartstein said, would help the company’s attempts to license the remaining part of the sector. 

While PIPCOs such as Marathon and Inventergy have had it tough, Finjan has been bucking market trends for a while. A series of financings, most recently in June, have strengthened its balance sheet, its portfolio has survived a thermonuclear attack at the Patent Trial and Appeal Board (PTAB) and alleged infringers have started to take licences. It is still engaged in some lengthy litigation, including a case against Blue Coat which is due to go to the Court of Appeals for the Federal Circuit in early September after Finjan won at district court.    

With a burgeoning licensing track record and a healthy balance sheet, as well as plenty of buying opportunities at generally low prices, Finjan is particularly well placed to grow its portfolio. So far, however, the company has stuck to its cyber security roots and looks set to resist the temptation to go on a purchasing spree.

“The notion of bulk buying of patents is a non-starter for Finjan,” Hartstein said. “These (Finjan Blue) assets are discrete assets and they cover technologies that we believe are observable in the marketplace where we have a skill and an expertise.” Of the 28 US grants in Finjan Inc’s portfolio, Hartstein revealed that they were currently enforcing 25 of them. “In other words there’s no fat in that portfolio.” The Finjan Blue patents were picked, he added, to be of the same value and calibre as the company’s legacy assets.

In buying the assets outright with cash, meaning that IBM is not due to share in any future licensing revenues, Finjan has also bucked another recent NPE trend which has seen numerous privateering deals take place where little cash changes hands upfront. “This deal was structured in a way that we could preserve and deliver all of the proceeds to shareholders,” Hartstein explained. “Yes it was harder to go through the process and arrive at a fixed value, paid over time, but that allows us to deliver more value to shareholders in the long term. The minute that you do a deal where you split a back end you cripple your margins.”

That’s particularly onerous in the current tough market conditions. “If you look at anything that’s happened in the last five to six years, what do we know to be true about patent licensing?” Hartstein asked. “It costs more than it did before, you endure more time than you had expected, there’s more uncertainty from all of the new administrative challenges and at the end of the day you still get less expected returns from those investments, so that means you have to maintain your margins.”    

Finjan’s recent successes have not gone unnoticed and Hartstein revealed that over the last couple of years the company had fielded an unexpected amount of inbound inquiries from very large businesses about patent deals. “We pushed most of those off very quickly because this was never intended to be just a licensing programme,” he claimed. “If it wasn’t for IBM being a known quantity to Finjan and our board this deal would not have had any wheels.”

But the transaction has prompted another surge of inquiries. “In the last two or three days we’ve had just as many companies call us and say “congratulations and by the way we have something to sell you”,” Hartstein commented. “And my message to them is that ship has sailed.”