Tessera says that Starboard Value wants to turn it from an R&D business into a patent “troll.”
The battle between activist investor Starboard Value and Tessera Technologies (NASDAQ: TSRA) took a nasty turn this week with Tessera publishing on May 6 a letter to shareholders explaining “the superiority of its IP business model” and how Starboard is determined to change it to a company that values lawyers over engineers.
Starboard, a 7.7% shareholder in TSRA countered on May 7 with its own letter to shareholders that “addresses some of the recent misleading statements, false allegations, and gross misrepresentations made by Tessera, and provides its views on the recent corporate governance manipulations carried out by the Company.”
Among the points Tessera raises in its letter is that Starboard would rather abandon the company’s $33 million R&D investment for more frequent and expensive litigation. “Starboard’s strategy,” said Tessera, “can best be analogized as cutting down the apple tree to harvest the apples. In essence, Starboard wants to operate a business that seeks out defendants rather than customers.”
Tessera’s letter positively characterizes a list of Technology IP Licensing Companies with positive five-year operating margins, putting itself at the top, and names like Dolby, InterDigital, ARM Holdings and MIPS Technologies right behind. The letter calls RPX Corporation, Acacia Technologies and WiLAN “Patent Trolls,” and shows that they have weaker margins than the Licensing Companies, and no R&D to speak of.
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Tessera’s description of RPX, Acacia and WiLAN as poorly run predators is unfortunate and unlikely to improve its relations with shareholders.
So-called “black hat” NPEs who enforce dubious assets are fewer and further between than some would like to believe. It’s inaccurate to say that NPEs without R&D or product sales, who might settle quicker than others, are by nature equipped with lesser quality patents. It takes many different IP models to make an ecosystem, including those who may ask less for a license in court even though they may win more in a protracted litigation.
Tessera’s business model is a valid one. It draws upon R&D and operations, in the hope of establishing “carrot” licenses, when possible. It has delivered value, but Starboard believes the ROI is insufficient, and the company would perform better with a more in-your-face, sue first and negotiate later approach.
Starboard is saying that it the company’s share price of about $20.64 and a current market value of just under $1.1 billion does not reflect the company’s true worth, and that its strategy is holding it back. (Starboard does not indicate what is a more accurate valuation.) It makes sense that Tessera’s management would to want to fight for what it believes is a superior approach, but it must be careful what it says and how it conveys it.
In patent licensing today, what may start out as a legal battle may wind up as a customer.
NPEs, with or without operating units, sniping at each other, and separating themselves by claiming to have a superior or more ethical business model play into the hands of IP naysayers, like Sen. Charles Schumer (D-NY).
Schumer recently said that “patent trolls are preying on New York’s technology industry with unwarranted lawsuits, costing legitimate [my italics] companies billions of dollars.” He announced last week that he had introduced new legislation designed to crackdown on a growing problem. (Schumer led the effort to prevent patents held by Data Treasury that read on financial institutions from being enforced.)
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Activist investors have been around for decades. Carl Icahn, among others, have made them famous (or is that infamous?), and many shareholders rich. Icahn, as you may recall, put pressure on Motorola to sell its patents, before the entire company was sold to Google for $12.5 billion. Starboard has brought the challenge of higher value to businesses with significant IP holdings. It played an important role in the AOL’s $1.05 billion portfolio sale to Microsoft, which was in turn partially sold to Facebook.
Named by IAM as one of its IP personalities of 2012, Starboard has history when it comes to shareholder activism and patents. In February 2012, the firm wrote to the board of its AOL investment, criticizing the company’s IP strategy and accusing it of failing to realize the monetization potential of its patent assets. Starboard stated that it would be putting up its own candidates for election to AOL’s board. Within two months, AOL had sold its patent portfolio to Microsoft.
I can understand Tessera’s frustration with having a professional investor looking over its shoulder telling it what strategy it should pursue. However, Starboard is looking for the best return on its investment.
Another Starboard investment is MIPS Technologies, which participated in a November 2012 sale of most of its patents for $350 million to a consortium organized by defensive patent aggregator Allied Security Trust and led by UK semiconductor IP company ARM Holdings.
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IP monetization is a rapidly changing business. When it comes to publicly held companies with significant IP assets its as easy to loose sight of patent quality as it is of market value.
Illustration source: tessera.com; starboardvalue.com