9 Nov

Activist investor – companies too focused on number of patents they file each year

A co-founder of Starboard Value, an investment fund that has been one of the most prominent activist investors in the IP space since it was founded in 2011, has called into question corporate strategies that link innovation to the number of patents a company files. He also queried the worth of initiatives that reward employees for filing patents with little focus on the quality or overall relevance of those grants.

Peter Feld, who is a portfolio manager and the head of research at Starboard, was speaking at the IP Dealmakers Forum which was held in New York earlier this week. “For too long companies have talked about the level of their innovation based on the number of patents they file every year,” he told delegates.

Feld pointed out that swelling IP stockpiles come with a considerable overhead and added: “What’s lost on many, including many board members that don’t have backgrounds in IP, is that it costs money to prosecute patents and to maintain them.”

Part of the problem he said was the way some companies, particularly in tech, encourage their staff to generate grants.  “Too many companies in the Valley have these programmes where they incentivise employees to develop patents and pay them for patents and they do it in a way where they value a patent that’s completely useless that has no use case and no real value, the same as they would a completely ground-breaking invention that could generate billions in revenue and they pay those engineers the same for those two problems,” Feld asserted. “That’s a problem — it’s incentivising people to create patents that cost the company money that may not have any potential future value.”

Starboard has a significant track record in investing in IP-rich companies or encouraging tech businesses with large portfolios to monetise their portfolio more aggressively. In 2013 it fought a very public activist battle with the semiconductor business Tessera (now known as Xperi) calling on the company to focus far more on licensing. In 2012, meanwhile, the firm criticised AOL over its lack of action in monetising its grants. The tech giant later sold a portfolio of 800 assets and a licence to 300 more to Microsoft for a little over $1 billion (some of those patents were then bought by Facebook).  

Unlike many investors, Feld and his colleagues at Starboard have demonstrated time and again that they are acutely aware of the value that IP assets can represent on a company’s balance sheet. He claimed that there had been an evolution in activist investing which had become far less confrontational in recent years as company boards don’t simply look to push the likes of Starboard away.

Feld cautioned that, despite his own fund’s track record in the IP space, not all portfolios could generate significant value on the secondary market. “On paper I have seen plenty of analysis around portfolios that should have theoretical value to a buyer but you have to think carefully about the implication [of a sale] for customers of the company and partners of the company,” he said.

He also highlighted a recent deal with a Starboard portfolio company which was signing a customer purchase agreement with an equipment manufacturer which would not sign the agreement without a guarantee that the portfolio company’s entire patent portfolio could not be asserted against it and its customers and suppliers, including if those grants were sold in the future. Customers, he claimed, had become smarter and were making it increasingly hard for companies to monetise IP in their core markets.

For those businesses with the kind of over-sized portfolios that Feld was highly critical of, that means that their monetisation options may be increasingly curtailed.

Richard Lloyd

Author | Editor

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