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The Evolving IP Market An Inventors Walk Down Wall Street James E. Malackowski April 2013.

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Presentation on theme: "The Evolving IP Market An Inventors Walk Down Wall Street James E. Malackowski April 2013."— Presentation transcript:

1 The Evolving IP Market An Inventors Walk Down Wall Street James E. Malackowski April 2013

2 2 DISCLAIMER: THIS PRESENTATION WAS PREPARED BY REQUEST FOR EDUCATIONAL DISCUSSION PURPOSES ONLY AND DOES NOT NECESSARILY REPRESENT THE VIEWS OF OCEAN TOMO, LLC, ITS AFFILIATES, CLIENTS, EMPLOYEES OR EXECUTIVES. USE IS BY PERMISSION OF THE AUTHOR ONLY. SELECTIVE DATA OR IMAGES TAKEN OUT OF CONTEXT MAY BE MISLEADING TO A SUBSEQUENT AUDIENCE OR TRIER OF FACT.

3 3 What’s Happening Now?

4 4 The Big Picture

5 5 Nortel Auction Generates 3x Expected Price, Bonds Get Par + Accrued Subs Turn Out to be an Even Better Bet  Ocean Tomo valued the senior bonds when they were trading in the 70’s  Based on Ocean Tomo’s valuation, hedge fund clients generated significant returns on both the seniors and the subs Opportunity Behind The Headlines -- Nortel

6 6 6 ALU IP Portfolio (# patents and Average IPQ Score) ALU IP Collateralized Debt (Liquid)

7 7 Going Private - Mosaid

8 8 Private Equity / Venture Capital Investing Patent Filings in 5 Years Before First VC Investment Patent Filings in 5 years Before and 5 Years After First VC Investment YesNoYesNo No. of VC Investment Rounds VC Duration (years to next funding) VC Incubation (years from first round to last) First Round Investment ($mln.) Total VC Investment ($ mln.) Probability of Going Public (%) Probability of Bankruptcy (%) Observations1,4668,2951,5018,601 Thomson VentureXpert database for the period. See Cao, Jerry X. and Hsu, Po Hsuan (2010), Patent Signaling, Entrepreneurial Performance, and Venture Capital Financing, forthcoming, 31. Private Companies With Strong IP Are More Likely to Get Additional Funding And Less Likely To Go Bankrupt

9 9 9 Shareholder Activism – Motorola Mobility StrategyPartiesSituationStatus Change of Control Transactions MMI / GOOG On heals of successful Nortel patent auction Carl Icahn demands sale or break up of the company. Deal announced for GOOG to buy MMI for $12.5 bln. Deal close by year end. Focus on US and European antitrust issues. “Motorola is activism at its best and we applaud management and the Board for acting so responsibly.” - Carl C. Icahn 8/15/11

10 10 Shareholder Activism - AOL  Starboard is an activist who became one of the largest shareholders of AOL  On Feb 24, 2012, Starboard publicly wrote the Board: AOL owned a robust portfolio of extremely valuable patents that had gone unrecognized and underutilized Starboard believed that AOL’s patent portfolio could produce in excess of $1 billion of licensing income if appropriately harvested and monetized AOL’s inaction … was alarming … the Company’s most valuable patents would expire worthless  On March 13, 2012, CEO Tim Armstrong stated at an investor conference that: “... AOL’s patent portfolio, it’s beachfront property…it’s basically extremely valuable.”  On Apr 9, 2012, AOL announced the sale of its patent portfolio to Microsoft for $1.056 billion in cash.

11 11 Shareholder Activism - AOL We cannot find one instance prior to our February 2012 letter in which Mr. Armstrong had ever publicly made reference to, or commented on, AOL’s valuable patent portfolio. – Starboard Value L.P., May 25, 2012.

12 12 IP Event Trading – Litigation StrategyPartiesSituationStatus IP Litigation Outcomes VHC v. AAPL, et al VHC is for patent infringement On April 25, 2012, Judge Davis issued a preliminary Markman order signaling VHC has a strong case.

13 13 Fundamental Long/Short Trades Tesla (TSLA) / Ford (F) / General Motors (GM) – IP data helped identify proprietary battery technology as the key to first mover advantage and safety advantage. The trade was long TSLA/ short F/GM and a basket of auto suppliers to hedge out Beta. Generated 100% relative returns; initiated 5/11.

14 14 U.S. Equities – OTP v. SPX OTP Performance v. SPX (1/07 to 1/12) Annual Excess Ret.Cumulative Excess Ret.Tracking Error  The graph at left shows the five year performance of a portfolio of 300 stocks picked using quantitative IP valuation tools v. the S&P 500  The portfolio is composed of stocks representing all market caps and styles and, therefore, does not exhibit those biases  As the IP index has consistently outperformed the S&P 500  Capturing that outperformance or “alpha” across a family of investment strategies results in superior risk- adjusted and absolute returns relative to the market.

15 15 U.S. / China 200™ Patent Index  The graph at left shows the five year performance of a portfolio comprised of the top 100 companies that own the most valuable US patents relative to their book value and 100 companies that have the most valuable Chinese patents.  The portfolio is composed of stocks representing all market caps and styles and, therefore, does not exhibit those biases  Over the five-years of back testing, the U.S. / China 200™ Patent Index has outperformed its’ benchmark the MSCI World Index by 2922 basis points.

16 16 How Did We Get Here?

17 17 Market Development High Low Defensive Cross Licensing Congress Competitive Litigation Royalty Licensing 1. Period of Feudal Lords 1 st Generation IP Historical Evolution

18 18 Public Auctions Market Development High Low Defensive Cross Licensing Congress Competitive Litigation Patent Pools Royalty Licensing 1. Period of Feudal Lords 2. Rise of the Intermediary Web Portals Contingent Counsel Bowie Bonds 1 st Generation 2 nd Generation IP Historical Evolution

19 19 Public Auctions IP Event Trading Market Development High Low Defensive Cross Licensing Equity Indexes Congress Competitive Litigation Patent Pools Activists Royalty Licensing 1. Period of Feudal Lords 2. Rise of the Intermediary 3. Age of the Golden Rule Web Portals Contingent Counsel Bowie Bonds Privateers 1 st Generation 2 nd Generation 3 rd Generation (Part 1) IP Historical Evolution Going Private

20 20 What Can We Expect Next?

21 21 Traded Exchange (IPXI) Market Development High Low “Taxation Economy” Changing Numbers (Accounting, Reporting and Damages) Regional Centers 3 rd Generation (Part 2) IP Evolution Continued Risk Management Sovereign Funding

22 22 Traded Exchange (IPXI) Market Development High Low “Taxation Economy” Changing Numbers (Accounting, Reporting and Damages) Regional Centers 3 rd Generation (Part 2) IP Evolution Continued Risk Management Sovereign Funding

23 23 Risks 1. Unintended secondary consequences of legislative or judicial reform; one-way judicial ratchet 2. Continued dilution of “power to exclude” (e.g. ebay; ITC; essential patents) 3. Concentrated foreign sovereign ownership and management of IP rights; lacking U.S. policy 4. Misconceived financial reporting requirements 5. Single-sided corporate attitude to monetization 6. Exhaustive “wait and see” attitude 7. Unchecked shareholder activism and litigation 8. Failure of risk markets to develop 9. Failure to attract liquidity providers 10. Public failures due to false expectations

24 24 Risks 1. Unintended secondary consequences of legislative or judicial reform; one-way judicial ratchet 2. Continued dilution of “power to exclude” (e.g. ebay; ITC; essential patents) 3. Concentrated foreign sovereign ownership and management of IP rights; lacking U.S. policy 4. Misconceived financial reporting requirements 5. Single-sided corporate attitude to monetization 6. Exhaustive “wait and see” attitude 7. Unchecked shareholder activism and litigation 8. Failure of risk markets to develop 9. Failure to attract liquidity providers 10. Public failures due to false expectations

25 25  Jan. 18, 2012 – Kodak valued its patent portfolio at $2.2 to $2.6 billion in motion filed by Kodak  Notwithstanding EK’s declared intent to sell 1,100 patents on July 22 nd, stock has continued downward Kodak

26 26 Risk Management - Patent Royalty Trust™ Insurance Establish Trust “Interpleader” Notice (optional) Select Products / Technology Areas Fairness Opinion License Execution and Payment

27 27 Traded Exchange (IPXI) Market Development High Low “Taxation Economy” Changing Numbers (Accounting, Reporting and Damages) Regional Centers 3 rd Generation (Part 2) IP Evolution Continued Risk Management Sovereign Funding

28 28 Activity  Europe Fund (France Brevets) designed to create new economy infrastructure which favors inventions (EU 50 million)  Taiwanese Fund to acquire IP to assist local companies  Japan Fund targeted investments in life-science IP  Korea Fund to promote local IP rights (USD 403 million reported)  LESI Global Technology Impact Forum received Delegations from Turkey, China, Singapore, the Philippines, UAE and Hong Kong Sovereign Funding Impact  P-LEC defense  Manufacturing cost advantage  Recycled and managed primary research funding  Protect domestic industry  Export judicial burden  Next generation “cartel”

29 29 Traded Exchange (IPXI) Market Development High Low “Taxation Economy” Changing Numbers (Accounting, Reporting and Damages) Regional Centers 3 rd Generation (Part 2) IP Evolution Continued Risk Management Sovereign Funding

30 30 Regionalization Regional Service Center U.S. EUROPE PAN-ASIA IP Central Market

31 31 IP Market Plans

32 32 Traded Exchange (IPXI) Market Development High Low “Taxation Economy” Changing Numbers (Accounting, Reporting and Damages) Regional Centers 3 rd Generation (Part 2) IP Evolution Continued Risk Management Sovereign Funding

33 33 Changing Numbers  FASB 141/142  IP to fill the “GAAP” now in U.S. and Germany at a minimum  IP reporting in Hong Kong (HKSE Feb 2012 Guidance)  Changing damages accounting / Daubert patchwork quilt  Expanding efforts towards global ratings now in U.S., Europe and across Asia

34 34 Ratings

35 35 Taxation Economy  Growing expectation / consent to pay IP “tax”  Low per unit effect across all products  Catalyst to greater IP based reporting  Consistent with planned IP exchange models  Decomposition of cross licenses  True Governmental taxation starting with cross border affiliate entities

36 36 Traded Exchange (IPXI) Market Development High Low “Taxation Economy” Changing Numbers (Accounting, Reporting and Damages) Regional Centers 3 rd Generation (Part 2) IP Evolution Continued Risk Management Sovereign Funding

37 37 IP Exchange – U.S. Efforts Accelerating The Intellectual Property Exchange International (IPXI) is the world’s first financial exchange that facilitates non-exclusive licensing and trading of intellectual property (IP) rights with market-based pricing and standardized terms. The result is an exchange that operates under two core principles: transparency and efficiency. IPXI invites all IP market participants to consider membership.

38 38 IPXI – Unit License Right™ Contracts USP X,XXX,137 A / B / C GENERAL DESCRIPTION:USP X,XXX,137 A / B / C Valve Seat Insert PATENT(S): USP X,XXX,137 and continuations, continuations-in-part and foreign counterparts. FIELD OF USE: All RESTRICTIONS:All secondary sales through IPXI ISSUER RIGHT TO USE: Yes including all subsidiaries UNIT BASIS: Each ULR covers one automotive or light truck engine TOTAL OFFERED QTY: 50 million license units offered in 10 unit lots OPENING:Dutch Auction (50% minimum quantity and price) OFFERING TERM: 3 years TERM OF LICENSE: Until consumed IPXI PRICE BANDING:+ / - 20% INITIAL OFFERING (TRANCHES) U137A: 10 million ULRs $0.50 per unit U137B: 10 million ULRs $0.75 per unit U137C: 30 million ULRs $1 per unit FOLLOW-ON OFFERINGS Unlimited50 million ULRsDeemed Market Price

39 39 IPXI – Patent Value Indexes

40 40 Humanitarian Marketplace Development

41 41 The Evolving IP Market: A 30 year overnight success (more or less).

42 42 Revolution

43 43 Ocean Tomo Overview

44 44 Ocean Tomo History 1987 Organized first national practice to offer Intellectual Property valuation opinions at a time when the Big-8 accountancies refused to address this growing asset class Co-founded first dedicated, full-service Intellectual Property consultancy offering advice on valuation, litigation damages and tax Created first integrated Intellectual Property strategy consulting group offering Intellectual Property Quality Management services to large Fortune 500 clients Founded first private equity advisory partnership to originate large-scale investments based on underlying Intellectual Capital Creation of first scaled investment banking practice, in partnership with leading Wall Street firm, dedicated exclusively to patent based structured finance Created nation's first integrated Intellectual Capital Merchant Banc™ firm Ocean Tomo acquired interest in PatentRatings.

45 45 Ocean Tomo History 2005 Created nation's first private equity and debt fund to invest in growing companies with strong Intellectual Property Successfully established a Live Public Auction Marketplace for Intellectual Property rights. Created the nation’s first index based on the value of Intellectual Property. The Ocean Tomo 300® Patent Index launched in September on the American Stock Exchange. Created The Intellectual Property Exchange International (IPXI) the world’s first financial exchange with an Intellectual Property focus Created Patent Bid-Ask, the first and only voice brokerage and online marketplace for Intellectual Property Created OTI, the first and only comprehensive source of global Intellectual Property- based market information that combines a free global patent search with timely and actionable market intelligence Created PatentMarking.com, the first and only online platform designed for the management of patent marking data.

46 46 James E. Malackowski 200 West Madison, 37 th Floor Chicago, IL (312) Ph


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