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For activists, IP is it

by Paula Schaap | Published February 29, 2012 at 2:30 PM

Tech is the new black for activist hedge funds.

It's all there in the 13Fs, the Securities and Exchange Commission forms that hedge funds with more than $100 million in assets under management must file every quarter disclosing their equity shares in public corporations.

Apple Inc., of course, is a perennial favorite -- George Soros upped his stake 13% in the fourth quarter last year; it's 2% of his portfolio, according to regulatory filings. Likewise, it's in the top position of David Shaw's $23 billion hedge fund D.E. Shaw & Co. LP.

But Apple isn't going anywhere anytime soon, even with the death of CEO Steve Jobs last year. The company's stock price hit an all-time high of $526.29 per share in mid-February based, in large part, on the company's astounding growth rate -- revenues were $46.3 billion in the fourth quarter of 2011, with year-over-year growth of 73.3% -- not to mention an Ebitda margin for 2011 of 32.9%, as compared to an industry standard of 12.2%.

So Apple might be a hedge fund favorite, but it's not for the activist end of the business.

Russell Glass, a Carl Icahn protégé and founder of RDG Capital LLC, which is involved in a campaign at software company DST Systems Inc., says two things have gotten activists into tech. First, the industry has matured, making companies less reliant on their boy-genius founders/CEOs for their brand. And second, Wall Street now understands better how to value intellectual property.

"As intellectual property has become more of a mainstream asset, that has enabled more financing [for deals]," Glass says.

While last year's big patent/activist story was Google Inc.'s $12.5 billion purchase of Motorola Mobility Holdings Inc.'s patents -- a sale engineered by corporate raider Icahn -- smaller activists are finding plenty of space to start campaigns.

Starboard Value LP, for example, is pushing AOL Inc. to do something about the fact that it's rapidly losing out on the Internet ad revenue front to competitors Google and Facebook Inc. In January, Starboard CEO Jeff Smith said the company should sell its money-losing content properties, The Huffington Post and Patch Media Corp., for which AOL paid $315 million and $7 million, respectively. Then, Smith said, AOL could live off the revenue stream from its legacy dial-up Internet business -- yes, Virginia, there is still dial-up -- until it could find a way to monetize its patent portfolio.

AOL said, thanks, but no thanks, and Smith is now in an all-out proxy fight with the content manager.

Starboard Value also took a new position in Tessera Technologies Inc. in the fourth quarter, which Glass describes as practically a pure IP play. Another new position was in Exar Corp., which is developing software for cloud-based applications, and could also potentially have a valuable patent portfolio.

Rob Stewart, executive vice president of Acacia Research Corp., a patent-licensing company that late last year bought Adaptix Inc.'s wireless technology patent portfolio for $160 million from private equity firm Baker Capital, says his company has had inquiries from activist hedge funds seeking Acacia's expertise as they try to figure out how to get value out of company patents.

Acacia just concluded a private placement of its stock, raising $225 million at $36.75 per share. Not only did the offering attract smaller investors who were already involved with Acacia, but mutual funds also bought shares, according to someone familiar with the deal, in what is the latest investment hot sector.

While Stewart wouldn't comment specifically on the fundraising, he says the company sees opportunities, either through outright purchase of other businesses, such as Adaptix, or patent portfolios, or joint ventures

"What we see is the emergence of intellectual property as a free-standing asset class," Stewart says.

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