Item 1. Business
ITEM 1. BUSINESS
General
Acacia Research Corporation (the “Company,” “we,” “us,” or "our") is an opportunistic capital platform that purchases businesses based on the differentials between public and private market valuations. We use a wide range of transactional and operational capabilities to realize the intrinsic value in the businesses that we acquire. Our ideal transactions include the acquisition of public or private companies, the acquisition of divisions of other companies, or structured transactions that can result in the recapitalization or restructuring of the ownership of a business to enhance value.
We are particularly attracted to complex situations, where value is not fully recognized in the public markets, where values of certain operations are masked by a diversified business mix, or where private ownership has not invested capital necessary to drive long-term value. We aim to operate a transactional platform through which we can initiate a strategic block position in public companies as a path to complete whole company acquisitions or strategic transactions that unlock value. We believe this business model is differentiated from private equity funds, which do not typically own public securities prior to acquiring companies, hedge funds, which do not typically acquire entire businesses, and other acquisition vehicles such Special Purpose Acquisition Companies, which are narrowly focused on completing one singular, defining acquisition.
Our focus is companies with market values in the sub-$2 billion range and particularly on businesses valued at $1 billion or less. We are, however, opportunistic, and may pursue acquisitions that are larger under the right circumstance.
We believe the Company has the potential to develop advantaged opportunities due to its:
• disciplined focus on identifying opportunities where the Company can be an advantaged buyer, initiate a transaction opportunity spontaneously, avoid a traditional sale process and complete the purchase of a business, division or other asset at an attractive price;
• willingness to invest across industries and in off-the-run, often misunderstood assets that suffer from a complexity discount;
• relationships and partnership abilities across functions and sectors; and
• strong expertise in corporate governance and operational transformation.
Our long-term focus positions our businesses to navigate difficult cycles and allows sellers and other counterparties to have confidence that a transaction is not dependent on achieving the types of performance hurdles demanded by private equity sponsors. We consider opportunities based on the attractiveness of the underlying cash flows, without regard to a specific fund life or investment horizon. Further, as a publicly traded company, we can offer sellers or employees straightforward equity participation in the ongoing business.
Currently, we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright through our Patent Licensing, Enforcement and Technologies Business. We own and operate a leading manufacturer and distributor of industrial impact printers, also known as line matrix printers, and related consumables and services through our Industrial Operations Business, and we continue to monetize assets from our Life Sciences Portfolio (as defined below).
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People, Process and Performance
Our investment platform is built on the principles of People, Process and Performance. We have built a management team with demonstrated expertise in Research, Transactions and Execution, and Operations and Management of our targeted acquisitions. We believe our priorities and skills underpin a compelling value proposition for operating businesses, partners and future acquisition targets, including:
• the flexibility to consummate transactions using financing structures suited to the opportunity and involving third-party transaction structuring as needed;
• the ability to deliver ongoing financial and strategic support; and
• the financial capacity to maintain a long-term outlook and remain committed to a multi-year business plan.
Relationship with Starboard Value, LP
Our strategic relationship with Starboard Value, LP (“Starboard”) provides us access to industry expertise, and operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard has provided, and we expect will continue to provide, ready access to its extensive network of industry executives and, as part of our relationship, Starboard has assisted, and we expect will continue to assist, with sourcing and evaluating appropriate acquisition opportunities.
Recapitalization
On October 30, 2022, the Company entered into a Recapitalization Agreement (the “Recapitalization Agreement”) with Starboard and certain funds and accounts affiliated with, or managed by, Starboard (collectively, the “Investors”), pursuant to which, among other things, the Company and Starboard agreed to enter into a series of transactions (the “Recapitalization”) to restructure Starboard’s existing investments in the Company in order to simplify the Company’s capital structure. Under the Recapitalization Agreement, the Company and Starboard agreed to take certain actions in connection with the Recapitalization. For a detailed description of the Recapitalization and the actions taken and contemplated to be taken in connection therewith, see Note 8 to the consolidated financial statements and to Item 7, "Management's Discussion and Analysis of Financial Condition and Results of Operations" for additional information.
Core Corporate Development and Investment Approach
Going forward, we plan to continue focusing on creating transactions where we are able to acquire operating businesses and strategic assets that we believe are undervalued. Our expertise in, and experience with, complex situations enables us to discover and structure opportunities that are attractive for our shareholders and the leadership of the businesses we purchase. We utilize our capabilities across Research, Transactions and Execution, and Operations and Management to drive the discovery, investment, acquisition and integration of such target opportunities.
Research
Through our Research platform we identify companies, both public and private, at an appreciable discount to intrinsic value. We have a broad mandate, with a particular interest in businesses operating in mature technology, industrial, healthcare and certain financial services sectors.
We believe attractive opportunities will continue to present themselves as publicly owned businesses can be misunderstood due to strategic misalignment such as an incompatible business mix or misdirected capital allocation strategy. We also see opportunities as large corporate owners seek to divest non-core operations. Overall, our acquisition pipeline is robust, and is a product of our public market research expertise, as well as our private market sourcing process.
The success of our strategy depends on our ability to properly identify acquisition candidates. Our approach often involves the concept of “applied investment banking”, whereby we can leverage our ability to understand complex situations,
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identify a path to value creation through deal structuring, and invest capital to drive such outcomes. Identifying these situations involves:
• engaging in a substantial amount of detailed fundamental research, both internally and in conjunction with third-parties;
• critically evaluating management teams;
• identifying and assessing financial and operational strengths and weaknesses absolutely and relative to industry competitors;
• researching and evaluating relevant industry information; and
• thoughtfully negotiating acquisition terms and conditions.
Transactions and Execution
Once we identify a favorable opportunity, we may purchase a strategic block of shares in the target company, if publicly traded. From that point, the process of consummating a transaction or acquisition can be time-consuming and complex, taking months if not a year or longer to complete.
During that time we will continue to leverage our management team’s experience and expertise in researching and valuing prospective target businesses, as well as negotiating the ultimate acquisition of such target businesses. We will also leverage the extensive networks of our operating partners, who are essential partners in identifying and executing acquisitions and managing for value creation.
We also regularly review our portfolio for opportunities to build long-term shareholder value, which may result in the divestiture of certain businesses over time.
Operations and Management
Our operational strategy involves identifying critical operating management either within the businesses or divisions we acquire or from our extensive executive network. We support the management teams of each of our acquired businesses by, among other things:
• financing internal growth strategies;
• supporting attractive external growth and acquisition opportunities;
• providing resources to assist management in controlling overhead costs and leveraging platform-wide resources;
• implementing operational efficiencies; and
• sharing best practices across our portfolio companies.
Equity Securities Portfolio Investment
As an example of our opportunistic approach and flexibility, in early 2020, our research into the potential acquisition of a life science company led to the discovery of the "Life Sciences Portfolio", a portfolio of life science investments available for purchase at a substantial discount to realizable asset value. We negotiated an exclusive option to acquire the portfolio in April 2020, during a period of substantial uncertainty in the public markets in the early phase of the COVID-19 pandemic. In June 2020, we consummated the acquisition of the Link Equity Income Fund, a portfolio of investments in 18 public and private life sciences companies. That purchase was funded with a combination of available cash and capital from Starboard, for a total of approximately $282.0 million at the time of acquisition. Since the closing, equity markets have recovered, we sold a substantial number of these positions, and importantly, two of the private company holdings completed successful initial public offerings, which enabled us to realize gains. Through the end of 2022, we received proceeds of $504.3 million as we monetized the Life Sciences portfolio. We retained an investment in the Life Sciences Portfolio valued at $68.4 million at December 31, 2022. Refer to Note 3 to the consolidated financial statements elsewhere
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herein for additional information and to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information for the applicable periods presented.
Our Operations
Intellectual Property Operations - Patent Licensing, Enforcement and Technologies Business
We invest in intellectual property ("IP") and engage in the licensing and enforcement of patented technologies. Through our Patent Licensing, Enforcement and Technologies Business we are a principal in the licensing and enforcement of patent portfolios, with our operating subsidiaries obtaining the rights in the patent portfolio or purchasing the patent portfolio outright. While we, from time to time, partner with inventors and patent owners, from small entities to large corporations, we assume all responsibility for advancing operational expenses while pursuing a patent licensing and enforcement program. When applicable we share net licensing revenue with our patent partners as that program matures, on a pre-arranged and negotiated basis. We may also provide upfront capital to patent owners as an advance against future licensing revenue.
While that business saw activity slow significantly in 2018 and early 2019, beginning in late 2019, we began to commit modest amounts of capital to acquiring new portfolios, and have since successfully acquired the rights to five noteworthy new patent portfolios for aggregate consideration of approximately $46.9 million from 2019 to 2022.
Currently, on a consolidated basis, our operating subsidiaries own or control the rights to multiple patent portfolios, which include U.S. patents and certain foreign counterparts, covering technologies used in a variety of industries. We generate revenues and related cash flows from the granting of IP rights for the use of patented technologies that our operating subsidiaries control or own.
We have established a proven track record of licensing and enforcement success with over 1,600 license agreements executed to date as of December 31, 2022, across nearly 200 patent portfolio licensing and enforcement programs. As of December 31, 2022, we have generated gross licensing revenue of approximately $1.7 billion, and have returned $849.2 million to our patent partners.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional information concerning our Patent Licensing, Enforcement and Technologies business.
Industrial Operations Business
In October 2021, we consummated our first operating company acquisition of Printronix Holding Corp. (“Printronix”). Printronix is a leading manufacturer and distributor of industrial impact printers, also known as line matrix printers, and related consumables and services. Printers consist of hardware and embedded software and may be sold with maintenance service agreements, which are serviced by outside contractors. Printronix’s line matrix printers are used for mission critical applications within these industries, including labeling and inventory management, build sheets, invoicing, manifests and bills of lading, and reporting. In China, India and other developing countries in Asia and Africa, our printers are also prevalent in the banking and government sectors. Printronix has manufacturing, configuration and/or distribution sites located in Malaysia, the United States, Singapore, China and the Netherlands, along with sales and support locations around the world to support its global network of users, channel partners, and strategic alliances. Consumable products include inked ribbons which are used within Printronix's printers. Printronix’s products are primarily sold through Printronix’s global network of channel partners, such as dealers and distributors, to end‐users. This acquisition was made at what we believe to be an attractive purchase price, and we are now supporting existing management in its execution of strategic partnerships to generate growth.
Refer to Item 7. “Management’s Discussion and Analysis of Financial Condition and Results of Operations” for additional Industrial Operations information.
Competition
We face intense competition in identifying, evaluating and executing strategic acquisitions from other entities having a business objective similar to ours, including private equity groups and operating businesses seeking strategic acquisitions. We compete with financial firms, corporate buyers and others investing in strategic opportunities. Many of these competitors may have greater financial and human capital resources than we have. Additionally, our Patent Licensing,
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Enforcement and Technologies Business faces intense competition in identifying, evaluating and executing strategic acquisitions from other entities having similar business objectives. We compete with financial firms, corporate buyers and others investing in strategic opportunities and acquiring IP. Additionally, universities and other technology sources compete against us as they seek to develop and commercialize technologies and may receive financing for basic research in exchange for the exclusive right to commercialize resulting inventions. Many of these competitors may have greater financial and human capital resources than we have. We may find more companies entering the market for similar technology opportunities, which may reduce our market share in one or more technology industries that we currently or in the future may rely upon to generate future revenue.
Information Security
We are highly dependent on information technology networks and systems to securely process, transmit and store electronic information. Attacks on information technology systems continue to grow in frequency, complexity and sophistication. Such attacks have become a point of focus for individuals, businesses and governmental entities. These attacks can create system disruptions, shutdowns or unauthorized disclosure of confidential information, including non-public personal information, consumer data and proprietary business information.
We remain focused on making strategic investments in information security to protect the clients and information systems of our operating subsidiaries and unconsolidated affiliates. This includes both capital expenditures and operating expenses on hardware, software, personnel and consulting services. As the primary products and services of our operating subsidiaries and unconsolidated affiliates evolve, we apply a comprehensive approach to the mitigation of identified security risks. We have established risk management policies, including those related to information security and cybersecurity, designed to monitor and mitigate information security related risks.
Human Capital
As of December 31, 2022, on a consolidated basis, we had 263 full-time employees and six contractors. We believe we have good relations with our employees. As of December 31, 2022, our parent company had 14 full-time employees and two contractors, our Intellectual Property Operations business had eight full-time employees and no contractors and our Industrial Operations had 241 full-time employees and four contractors.
Additionally, we have a strategic relationship with Starboard that has provided, and we expect will continue to provide, us access to industry expertise and operating partners and industry experts to evaluate potential acquisition opportunities and enhance the oversight and value creation of such businesses once acquired. Starboard has provided, and we expect will continue to provide, ready access to its extensive network of industry executives and, as part of our relationship, Starboard has assisted, and we expect will continue to assist with sourcing and evaluating appropriate acquisition opportunities.
Where You Can Find Additional Information
For further details of the development of our business, refer to our Annual Report on Form 10-K for the year ended December 31, 2022. Our website address is www.acaciaresearch.com . The information on our website is not part of this Annual Report on Form 10-K and is not incorporated herein by reference.