IP Market Development - Chicago

Report
The Evolving IP Market
An Inventors Walk Down Wall Street
James E. Malackowski
April 2013
DISCLAIMER: THIS PRESENTATION WAS PREPARED BY REQUEST
FOR EDUCATIONAL DISCUSSION PURPOSES ONLY AND DOES NOT
NECESSARILY REPRESENT THE VIEWS OF OCEAN TOMO, LLC, ITS
AFFILIATES, CLIENTS, EMPLOYEES OR EXECUTIVES.
USE IS BY PERMISSION OF THE AUTHOR ONLY. SELECTIVE DATA
OR IMAGES TAKEN OUT OF CONTEXT MAY BE MISLEADING TO A
SUBSEQUENT AUDIENCE OR TRIER OF FACT.
2
What’s Happening Now?
3
The Big Picture
4
Opportunity Behind The Headlines -- Nortel
Nortel Auction Generates 3x Expected
Price, Bonds Get Par + Accrued


Subs Turn Out to be an Even Better Bet
Ocean Tomo valued the senior bonds when they were trading in the 70’s
Based on Ocean Tomo’s valuation, hedge fund clients generated significant returns
on both the seniors and the subs
5
ALU IP Collateralized Debt (Liquid)
900
800
ALU IP Portfolio
700
600
500
(# patents and
Average IPQ
Score)
400
300
200
100
0
2005
2006
2007
2008
2009
2010
6
2011
2012
6
Going Private - Mosaid
7
Private Equity / Venture Capital Investing
Private Companies With Strong IP Are More Likely to Get Additional Funding
And Less Likely To Go Bankrupt
Patent Filings in 5 Years Before
First VC Investment
Patent Filings in 5 years Before and 5
Years After First VC Investment
Yes
No
Yes
No
No. of VC Investment
Rounds
4.44
3.39
4.12
3.40
VC Duration (years to
next funding)
1.59
1.22
1.54
1.22
VC Incubation (years
from first round to
last)
5.68
2.79
4.79
2.61
First Round
Investment ($mln.)
15.93
11.21
17.17
12.28
Total VC Investment
($ mln.)
153.36
101.46
129.12
88.01
Probability of Going
Public (%)
67.39
14.81
68.15
14.54
Probability of
Bankruptcy (%)
3.47
10.12
3.22
9.50
Observations
1,466
8,295
1,501
8,601
Thomson VentureXpert database for the 1976-2005 period. See Cao, Jerry X. and Hsu, Po Hsuan (2010), Patent Signaling, Entrepreneurial Performance,
and Venture Capital Financing, forthcoming, 31.
8
Shareholder Activism – Motorola Mobility
Strategy
Change of Control
Transactions
Parties
MMI /
GOOG
Situation
Status
On heals of successful Nortel
patent auction Carl Icahn
demands sale or break up of
the company.
Deal announced for GOOG to buy MMI for $12.5
bln. Deal close by year end. Focus on US and
European antitrust issues.
“Motorola is activism at its best and we applaud
management and the Board for acting so responsibly.”
- Carl C. Icahn 8/15/11
9
9
Shareholder Activism - AOL




Starboard is an activist who became one of the largest
shareholders of AOL
On Feb 24, 2012, Starboard publicly wrote the Board:
 AOL owned a robust portfolio of extremely valuable
patents that had gone unrecognized and
underutilized
 Starboard believed that AOL’s patent portfolio could
produce in excess of $1 billion of licensing income if
appropriately harvested and monetized
 AOL’s inaction … was alarming … the Company’s
most valuable patents would expire worthless
On March 13, 2012, CEO Tim Armstrong stated at an
investor conference that: “... AOL’s patent portfolio,
it’s beachfront property…it’s basically extremely
valuable.”
On Apr 9, 2012, AOL announced the sale of its patent
portfolio to Microsoft for $1.056 billion in cash.
10
Shareholder Activism - AOL
We cannot find one instance prior to our February 2012 letter in which Mr. Armstrong had ever
publicly made reference to, or commented on, AOL’s valuable patent portfolio.
– Starboard Value L.P., May 25, 2012.
11
IP Event Trading – Litigation
Strategy
Parties
Situation
Status
IP
Litigation
Outcomes
VHC v. AAPL,
et al
VHC is for patent
infringement
On April 25, 2012, Judge Davis issued a preliminary
Markman order signaling VHC has a strong case.
12
Fundamental Long/Short Trades
Tesla (TSLA) / Ford (F) / General Motors (GM) – IP data helped identify
proprietary battery technology as the key to first mover advantage and safety
advantage. The trade was long TSLA/ short F/GM and a basket of auto suppliers to
hedge out Beta. Generated 100% relative returns; initiated 5/11.
13
U.S. Equities – OTP v. SPX
Manager Performance
January 2007 - January 2012

The graph at left shows
the five year
performance of a
portfolio of 300 stocks
picked using quantitative
IP valuation tools v. the
S&P 500

The portfolio is
composed of stocks
representing all market
caps and styles and,
therefore, does not
exhibit those biases

As the IP index has
consistently
outperformed the S&P
500

Capturing that
outperformance or
“alpha” across a family
of investment strategies
results in superior riskadjusted and absolute
returns relative to the
market.
Single Computation
130
120
110
100
Guggenheim Ocean Tomo Patent (NAV)
SPDR S&P 500 (NAV)
90
80
70
60
50
15%
Cumulative Excess Return
vs. Market Benchmark
10%
5%
0%
Dec 2006
Jun 2007 Dec 2007
Jun 2008 Dec 2008
Jun 2009 Dec 2009
Jun 2010 Dec 2010
Jun 2011 Jan 2012
OTP Performance v. SPX (1/07 to 1/12)
Annual Excess Ret.
Cumulative Excess Ret.
Tracking Error
1.47
7.88
3.6
14
U.S. / China 200™ Patent Index

The graph at left shows
the five year
performance of a
portfolio comprised of
the top 100 companies
that own the most
valuable US patents
relative to their book
value and 100
companies that have
the most valuable
Chinese patents.

The portfolio is
composed of stocks
representing all market
caps and styles and,
therefore, does not
exhibit those biases
 Over the five-years of
back testing, the U.S. /
China 200™ Patent
Index has outperformed
its’ benchmark the MSCI
World Index by 2922
basis points.
15
How Did We Get Here?
16
IP Historical Evolution
Market Development
High
Royalty
Licensing
Defensive
Cross
Licensing
Competitive
Litigation
1. Period of Feudal Lords
Congress
Low
1st Generation
17
IP Historical Evolution
Market Development
High
Royalty
Licensing
Defensive
Cross
Licensing
Public
Auctions
Bowie Bonds
Patent Pools
Competitive
Litigation
Congress
Web Portals
1. Period of Feudal Lords
Contingent
Counsel
Low
1st Generation
2nd Generation
18
2. Rise of the Intermediary
IP Historical Evolution
High
Royalty
Licensing
Public
Auctions
Equity Indexes
Market Development
Activists
Defensive
Cross
Licensing
Bowie Bonds
IP Event
Trading
Privateers
Patent Pools
Going Private
Competitive
Litigation
Congress
Web Portals
1. Period of Feudal Lords
Contingent
Counsel
Low
1st Generation
2nd Generation
19
2. Rise of the Intermediary
3. Age of the Golden Rule
3rd Generation (Part 1)
What Can We Expect Next?
20
IP Evolution Continued
High
“Taxation Economy”
Market Development
Changing
Numbers
(Accounting,
Reporting and
Damages)
Traded Exchange
(IPXI)
Regional
Centers
Sovereign
Funding
Risk
Management
Low
3rd Generation (Part 2)
21
IP Evolution Continued
High
“Taxation Economy”
Market Development
Changing
Numbers
(Accounting,
Reporting and
Damages)
Traded Exchange
(IPXI)
Regional
Centers
Sovereign
Funding
Risk
Management
Low
3rd Generation (Part 2)
22
Risks
1.
2.
3.
4.
Unintended secondary
consequences of legislative
or judicial reform; one-way
judicial ratchet
Continued dilution of
“power to exclude” (e.g. ebay;
ITC; essential patents)
Concentrated foreign
sovereign ownership and
management of IP rights;
lacking U.S. policy
Misconceived financial
reporting requirements
23
5.
Single-sided corporate
attitude to monetization
6.
Exhaustive “wait and see”
attitude
7.
Unchecked shareholder
activism and litigation
8.
Failure of risk markets to
develop
9.
Failure to attract liquidity
providers
10.
Public failures due to false
expectations
Risks
1.
2.
3.
4.
Unintended secondary
consequences of legislative
or judicial reform; one-way
judicial ratchet
Continued dilution of
“power to exclude” (e.g. ebay;
ITC; essential patents)
Concentrated foreign
sovereign ownership and
management of IP rights;
lacking U.S. policy
Misconceived financial
reporting requirements
24
5.
Single-sided corporate
attitude to monetization
6.
Exhaustive “wait and see”
attitude
7.
Unchecked shareholder
activism and litigation
8.
Failure of risk markets to
develop
9.
Failure to attract liquidity
providers
10.
Public failures due to false
expectations
Kodak


Jan. 18, 2012 – Kodak valued its patent portfolio at $2.2 to $2.6 billion in motion
filed by Kodak
Notwithstanding EK’s declared intent to sell 1,100 patents on July 22nd, stock has
continued downward
25
Risk Management - Patent Royalty Trust™
Select Products / Technology Areas
Fairness Opinion
Insurance
Establish Trust
“Interpleader” Notice (optional)
License Execution and Payment
26
IP Evolution Continued
High
“Taxation Economy”
Market Development
Changing
Numbers
(Accounting,
Reporting and
Damages)
Traded Exchange
(IPXI)
Regional
Centers
Sovereign
Funding
Risk
Management
Low
3rd Generation (Part 2)
27
Sovereign Funding





Activity
Europe Fund (France Brevets)
designed to create new economy
infrastructure which favors
inventions (EU 50 million)
Taiwanese Fund to acquire IP to
assist local companies
Japan Fund targeted investments
in life-science IP
Korea Fund to promote local IP
rights (USD 403 million reported)
LESI Global Technology Impact
Forum received Delegations from
Turkey, China, Singapore, the
Philippines, UAE and Hong Kong






28
Impact
P-LEC defense
Manufacturing cost advantage
Recycled and managed primary
research funding
Protect domestic industry
Export judicial burden
Next generation “cartel”
IP Evolution Continued
High
“Taxation Economy”
Market Development
Changing
Numbers
(Accounting,
Reporting and
Damages)
Traded Exchange
(IPXI)
Regional
Centers
Sovereign
Funding
Risk
Management
Low
3rd Generation (Part 2)
29
Regionalization
Regional Service
Center
U.S.
Regional Service
Center
IP
Central
Market
Regional Service
Center
Regional Service
Center
PAN-ASIA
EUROPE
Regional Service
Center
30
IP Market Plans
31
IP Evolution Continued
High
“Taxation Economy”
Market Development
Changing
Numbers
(Accounting,
Reporting and
Damages)
Traded Exchange
(IPXI)
Regional
Centers
Sovereign
Funding
Risk
Management
Low
3rd Generation (Part 2)
32
Changing Numbers

FASB 141/142

IP to fill the “GAAP” now in U.S. and Germany at a minimum

IP reporting in Hong Kong (HKSE Feb 2012 Guidance)

Changing damages accounting / Daubert patchwork quilt

Expanding efforts towards global ratings now in U.S., Europe
and across Asia
33
Ratings
34
Taxation Economy

Growing expectation / consent to pay IP “tax”

Low per unit effect across all products

Catalyst to greater IP based reporting

Consistent with planned IP exchange models

Decomposition of cross licenses

True Governmental taxation starting with cross border
affiliate entities
35
IP Evolution Continued
High
“Taxation Economy”
Market Development
Changing
Numbers
(Accounting,
Reporting and
Damages)
Traded Exchange
(IPXI)
Regional
Centers
Sovereign
Funding
Risk
Management
Low
3rd Generation (Part 2)
36
IP Exchange – U.S. Efforts Accelerating
The Intellectual Property Exchange
International (IPXI) is the world’s
first
financial
exchange
that
facilitates non-exclusive licensing
and trading of intellectual property
(IP) rights with market-based pricing
and standardized terms. The result is
an exchange that operates under two
core principles: transparency and
efficiency. IPXI invites all IP market
participants to consider membership.
37
IPXI – Unit License Right™ Contracts
USP X,XXX,137 A / B / C
GENERAL DESCRIPTION:
PATENT(S):
FIELD OF USE:
RESTRICTIONS:
ISSUER RIGHT TO USE:
UNIT BASIS:
TOTAL OFFERED QTY:
OPENING:
OFFERING TERM:
TERM OF LICENSE:
IPXI PRICE BANDING:
USP X,XXX,137 A / B / C Valve Seat Insert
USP X,XXX,137 and continuations, continuations-in-part and
foreign counterparts.
All
All secondary sales through IPXI
Yes including all subsidiaries
Each ULR covers one automotive or light truck engine
50 million license units offered in 10 unit lots
Dutch Auction (50% minimum quantity and price)
3 years
Until consumed
+ / - 20%
INITIAL OFFERING (TRANCHES)
U137A:
10 million ULRs
U137B:
10 million ULRs
U137C:
30 million ULRs
$0.50 per unit
$0.75 per unit
$1 per unit
FOLLOW-ON OFFERINGS
Unlimited
50 million ULRs
Deemed Market Price
38
IPXI – Patent Value Indexes
39
Humanitarian Marketplace Development
INVENT FOR HUMANITY / KOPERNIK MARKETPLACE
Catalog
Page
Ask
Mobility in Romania
Q Drum Licensing & Mfg
Light to Atauro
Check-Out a Light
Drinks are on Me
8
9
10
11
12
$ 5,000
$ 8,000
$ 8,662
$10,963
$12,633
$
$
$
$
$
795
189
336
$
$
$
$
$
-
400
400
400
400
400
$
$
$
$
$
100
100
100
100
100
$
$
$
$
$
Water to Rural Nigerians
Make Some Noise Vietnam
Smarter Cooking India
Take a Load Off (Q Drum)
What Knowing Can Do
13
14
15
16
17
$ 4,948
$18,137
$ 4,187
$ 8,812
$ 6,245
$ 1,794
$ 11,001
$
753
$ 1,095
$
-
$
$
$
$
$
-
400
400
400
400
400
$
$
$
$
$
100
100
100
100
100
$ 1,894
$ 11,101
$
853
$ 1,195
$
100
What's Cookin'
When a Child is Born
Female Entrepreneurs
School Empowerment
18
19
20
21
$15,835
$10,773
$ 5,000
$ 5,000
$
$
$
$
$
$
$
$
5,000
-
400
400
400
400
$
$
$
$
100
100
100
100
$
$
$
$
Campaign Name
MFC Issued:
135,600
Beginning
Investment
673
560
-
MFC Allocated:
IFH Directed
Investment
5,600
40
IFH MFC
Allocation
MFC Price
Conversion
MFC Conversion:
Total
Funding
0.2500
100
100
895
289
436
773
660
5,100
100
Funding Goal:
$ 124,195
IFH Dir Invest:
$ 5,000
MFC Purchases:
$ 1,400
IFH On-site Funding:
$ 6,400
Total Funding:
$ 23,596
The Evolving IP Market:
A 30 year overnight
success (more or less).
41
Revolution
42
Ocean Tomo Overview
43
Ocean Tomo History
1987
Organized first national practice to offer Intellectual Property valuation opinions at a time
when the Big-8 accountancies refused to address this growing asset class.
1988
Co-founded first dedicated, full-service Intellectual Property consultancy offering advice
on valuation, litigation damages and tax.
1993
Created first integrated Intellectual Property strategy consulting group offering Intellectual
Property Quality Management services to large Fortune 500 clients.
1999
Founded first private equity advisory partnership to originate large-scale investments
based on underlying Intellectual Capital.
2002
Creation of first scaled investment banking practice, in partnership with leading Wall
Street firm, dedicated exclusively to patent based structured finance.
2003
Created nation's first integrated Intellectual Capital Merchant Banc™ firm.
2004
Ocean Tomo acquired interest in PatentRatings.
44
Ocean Tomo History
2005
Created nation's first private equity and debt fund to invest in growing companies with
strong Intellectual Property.
2006
Successfully established a Live Public Auction Marketplace for Intellectual Property rights.
Created the nation’s first index based on the value of Intellectual Property. The Ocean
Tomo 300® Patent Index launched in September on the American Stock Exchange.
Created The Intellectual Property Exchange International (IPXI) the world’s first financial
exchange with an Intellectual Property focus.
2008
Created Patent Bid-Ask, the first and only voice brokerage and online marketplace for
Intellectual Property.
2009
Created OTI, the first and only comprehensive source of global Intellectual Propertybased market information that combines a free global patent search with timely and
actionable market intelligence.
2010
Created PatentMarking.com, the first and only online platform designed for the
management of patent marking data.
45
James E. Malackowski
200 West Madison, 37th Floor
Chicago, IL 60606
(312) 327-4410 Ph
[email protected]
46

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