Acacia Research Corp. (ACTG) may be looking to acquire a pre-IPO business or businesses and to wind down its struggling patent monetization business, former employees, who spoke on condition of anonymity because they signed nondisclosure agreements, said.

Newport Beach, Calif.-based Acacia may be able to spend as much as $600 million for a business or businesses using its $156.8 million in cash in combination with leverage, the former employees said.

The decision to move away from patent enforcement comes as the company has rebuffed investors' demand for a share buyback as a show of good faith to investors who have stuck with the company through some recent tough times. In December, Acacia's Adaptix unit suffered a devastating loss in an enforcement action filed against Alcatel-Lucent, which cost CEO Matt Vella his job.

Since March 1, Acacia directors G. Louis Graziadio III, Frank Walsh III, Fred De Boom, and officers interim CEO Marvin Key, CFO Clayton Haynes, General Counsel Edward Treska have quietly spent nearly $4 million buying stock, suggesting they see considerable value in Acacia.

Shares of Acacia are currently trading at $4.40 a share, giving it a market value of $221.75 million, which is roughly $70 million above its cash position. Four years ago Acacia shares traded above $40 a share.

After Vella's resignation, Acacia began a CEO search and named Marvin Key interim CEO. The appointment of Key surprised many inside Acacia, because Key has never run a public patent licensing before. He had been senior vice president of Acacia and CEO of Acacia Research Group, a wholly owned Plano, Texas-based subsidiary. The former Acacia employees said Key's role was mostly honorary, though he was responsible for investor relations.

The former Acacia employees said Key was an unlikely choice to head the company even on an interim basis. They said a more qualified choice would have been David Rosmann, a former executive vice president with licensing experience who was said to have wanted the job but was passed over. He left Acacia shortly thereafter.

Before joining Acacia, Key had been a principal at Thomas Weisel Partners from December 2000 to December 2005. Prior to that, he spent two years as a portfolio manager at Hermes Advisors from 1998 to 2000 and as a vice president at Salomon Brothers from May 1993 to November 1997. He declined a request for an interview.

Since taking on the interim CEO role, Key has relied heavily on Vella and former Chairman Robert “Chip” Harris III, who are each under a consulting contract for the sum of $840,000 a year, as well as the board, to make decisions on new enforcement actions, patent purchases and share buybacks, all of which have been in short supply.

Harris, who recently retired as chairman, and Vella were the architects of Acacia’s marquee portfolio strategy, which focused on monetizing portfolios such as Adaptix that could bring in more than $100 million in revenue. That strategy proved challenging.

Since then, Key and his Acacia team have fended off an unsolicited $189 million takeover offer from Uniloc Luxembourg SA, and fielded various inquires about a sale of the company or individual assets. Key and his team also have shifted their focus to existing enforcement actions rather than preparing new ones and slashed costs.

The cost cuts have fallen on some of the most talented licensing and business development executives inside Acacia including Rosmann.

Rosmann declined to comment because of a non-disclosure agreement.

Graziadio and Key didn't return requests for comment by phone and email. Vella declined to comment. Harris couldn't be reached for comment.

The former employees said that, even before Vella resigned, Acacia was considering new sources of revenue, which would have included advisory services related to the patent assertion business. That remains an obvious place to start for Acacia’s current management.

Graziadio is one of the two remaining members of Acacia’s new Office of the Chairman, which was created when Harris stepped down as executive chairman.

"It is over as we know it," said Greg Lewin, an investor who used to be shareholder of Acacia.

The former employees said Graziadio was the force on the board, who even before the Adaptix loss was directing Acacia to spend less on patent assertion and look for alternative businesses to bring in revenue. After the Adaptix loss, however, Graziadio feuded with Vella about Acacia’s direction, leading to the CEO’s departure. Harris sided with Vella in the dispute and later retired.

In addition to being the force behind Acacia’s new direction, Graziadio is chairman, president and CEO of Boss Holdings Inc., and president and director at Western Metals Corp. He also is on the board of National Italian American Foundation, Western Metals Corp., Boss Manufacturing Co., Graziadio Development Co., Beachcliff Real Estate Inc., and World Point Terminals LP.

He was previously a director of True Religion Apparel Inc., chairman, president and CEO of Second Southern Corp., and a managing partner of Ginarra Partners LLC. He also served on the board at Rosetta Resources Inc., Imperial Bancorp, and California Rice Bran Co. Inc.

Graziadio’s father George L. Graziadio Jr. founded Imperial Bancorp. in 1963. Imperial Bancorp was acquired by Comerica Bank for $1.3 billion in 2000. The younger Graziadio served as a director at Imperial Bancorp from 1984 to 2000.

The elder Graziadio, who died in 2002, also was a major donor to universities and gave $15 million in 1996 to Pepperdine University, which named its business school after him.

While Acacia currently has a dearth of licensing and business development talent, it has more than enough financial talent to handle an acquisition, leveraged recap or sale.

Walsh who was appointed as a director in April is a founding partner of WR Capital Partners, which according to its website has a strategy “to invest in public companies we judge to be attractive candidates for specific value-creating events including management buyouts, leveraged recapitalizations or other strategic alternatives.”

Graziadio and Walsh previously worked together at World Point Terminals LP, an oil storage company that priced its $175 million initial public offering in August 2013.

Walsh couldn't be reached for comment.

If Acacia does pursue an acquisition of a pre-IPO business, it wouldn't be the first patent licensing company to do so.

The former Unwired Planet Inc., now known as Great Elm Capital Group (GEC), already made such a move by selling its patent portfolio to Les Ware’s Optus UP Holding for $40 million. The company has already announced plans to merge with Full Circle Capital Corp. to become a business development company.

The former Acacia employees also said under Graziadio’s direction Acacia has allowed its patent assertion business to atrophy significantly. The company has not spent money on significant new patent portfolios or begun new enforcement campaigns. Instead, it has focused much of its energy on accelerating licensing agreements with infringers for deep discounts, way south of 50% of the asking price.

As such, any potential buyer of the patent assertion business is likely to get a business that is encumbered and winding down.

Any potential buyer would be wise to conduct significant due diligence, one former employee said. “Even if they paid only a dollar for it they’d still be overpaying because of the hefty costs of patent maintenance and bringing enforcement actions.”

Patent market observers said Acacia’s troubles are a sign of the times in the patent monetization space.

“I suspect the public IP licensing company model has played itself out,” said Sanjay Prasad, president of Prasad IP PC in Los Altos, California. “In this market, given the quarterly earnings pressure it’s just not workable to be a publicly traded company. It costs too much.”

If Acacia can go private and get its costs under control it could be quite profitable, he said.

Acacia “may be hitting a point where it makes sense to go private,” he said. “It’s a different structure but kind of like what Unwired Planet did. There’s certainly plenty of money circling around the IP space.”

When Key was appointed it seemed a concession to the change in the patent licensing climate, where Acacia and other licensing companies faced opponents increasingly unwilling to settle and eager to dig in for a costly and protracted legal fight in both the district courts as well as the Patent Trial and Appeal Board.

The changes in the U.S. patent litigation landscape were driven by the U.S. Supreme Court’s eBay v. MercExchange ruling, which made injunctive relief all but impossible, and its CLS Bank v. Alice decision, which declared most software and business method patents as obvious and therefore unpatentable.

In addition, the America Invents Act of 2011 created the PTAB to oversee challenges of patents through the inter partes review and covered business method review processes. The PTAB has invalidated 80% of patent claims it has reviewed in the IPR and CBM processes.

Acacia and other companies “were set up under a different set of circumstances when injunctions made infringers more wiling to settle and before the court’s skepticism of large damages awards and the IPR process gave them reason to fight,” said Mark Gober, a senior director at 3LP Advisors in Silicon Valley.

Gober also cited the example of Unwired Planet as a precedent for a sale of Acacia's patent assertion business.

Acacia is expected to report revenue of $23.33 million and earnings per share of 3 cents in the second quarter of 2016, compared with revenue of $40.3 million and a loss of 8 cents a share, a year ago. For the year, Acacia is expected to report revenue of $101.03 million and earnings per share of 22 cents, compared with revenue of $125.1 million and a loss per share of $3.25 for 2015.

Acacia generated nearly $25 million in revenue in the first quarter from a series of licensing transactions involving patent portfolios from Boston Scientific, Silicon Image, Nokia Networks, Bonutti, Adaptix and Covertech. The revenue also included payment from a trial verdict in 2011 for the case Lighting Ballast Control versus Universal Lighting, which went all the way to the Supreme Court.

During the conference call, Key indicated that Acacia would be able to break even with revenue of $105 million to $205 million, though with first quarter revenue of less than $25 million and the current climate that will be a huge challenge.

Since the first quarter, Acacia has announced no new patent purchases but at least eight licensing deals.

—To reach the reporter responsible for this story, please contact Dan Lonkevich at 707 318-7899 or at dan@thepatentinvestor.com