The Winners of Failed Patent Reform

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Last Wednesday night, patent reform was effectively killed (source). And given upcoming mid-term elections, it is unlikely that efforts will get rebooted anytime soon. This is a significant surprise to many as patent reform had largely been a bipartisan effort and was seen as an easy win for politicians. (I put the word surprise in bold because it is perhaps the single most important word in investing… wherever there is surprise, there is opportunity.)

A natural question follows every surprise: who benefits most?

In this case, the answer is clear: Intellectual Property holding companies. In the short to intermediate term, this news completely eliminates the biggest fear surrounding the sector: political risk. Any investor that believed a significant impairment to future earnings was coming has to completely rethink their position. In the longer term, a failure to enact patent reform implies the IP holding companies are in a significantly stronger political position than the market previously believed (some insight here). And this makes me think any future legislation will have little impact to the patent enforcement / patent licensing business model going forward.

This surprise opens a window of investment opportunity as the market begins to re-rate sector risk. And because lower risk equals higher multiples and higher stock prices, I believe the following companies are positioned to outperform the market over the coming months:

IDCC, RMBS, TSRA, ACTG, VHC, VRNG, IMI, COPY, ROVI, RPXC – click here to view my valuation spreadsheet.

There are a few companies on this list that are of particular interest to me: IDCC, TSRA, VRNG, and COPY (patent holding companies) and RPXC (SaaS patent risk management). Perhaps I’ll do a write-up on each in a future Buyside Note. In the meantime, those angry over the death of patent reform would be well served to consider a new spin on an old maxim:

If you can’t beat ‘em, buy ‘em.

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