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Thursday, October 4, 2012

Vringo: How Mark Cuban's Large Patent Hedge Bet Could Make A Bundle

Vringo: How Mark Cuban's Large Patent Hedge Bet Could Make A Bundle

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I rarely write about companies not related to the pharmaceutical industry these days but couldn't ignore the events surrounding a company I am writing about here. In April of this year Mark Cuban, well known entrepreneur and owner of the 2011 NBA champion Dallas Mavericks, made a significant investment of 7.4% in the company featured in this article named Vringo (VRNG). Mark Cuban has always been someone I admire in business which led me to start following this company. At first, I found his investment really interesting after recalling an interview with him about one year ago that was a foreshadowing to this transaction. I would encourage people to watch this interview that includes the always "frank" Mavericks owner referring to the buy and hold strategy as "a crock of (expletive)." Another comment that I enjoyed is, "Diversification is for idiots." However to his credit, he did clarify that his view in this matter is dependent on specific situations and goals of each individual investor.
Cuban goes on to comment how patent trolls are killing business and refers to the huge impact they have had on his businesses. Because of his negative comments regarding the practice of suing companies over patents, it struck me as odd that Cuban would buy a hefty stake in a company that is doing just that. However, it is obvious that although he isn't a fan of the way patents are handled in the U.S., he is savvy enough to know they can be worth billions of dollars.
In March, Vringo agreed to an all-stock merger with intellectual propertyfirm Innovate/Protect Inc., a company founded in 2011 that holds eight patents related to relevance filtering technology acquired from Lycos Inc.
Fast forwarding to June, Vringo obtained a favorable Markman ruling regarding their highly publicized lawsuit filed against Google Inc. (GOOG), AOL Inc. (AOL), and several other internet companies. Last week, this critical ruling was upheld by the judge with a slight tweaking of the definition of one of the technical terms discussed in the June ruling. The reason why this is an important ruling from what I've studied is that it predominantly leads to a settlement favoring the same party having the upper hand in the Markman ruling -- in this case Vringo.
It makes sense for Cuban to invest in a company such as Vringo. Cuban has stated that he's on the "flip side" of himself since he is effectively "long" several companies related to intellectual rights. Cuban’s investment here seems to suggest his position is an insurance hedge.
Cuban offered the following explanation related to his Vringo investment:
This is a hedge against the unlimited patent exposure all the companies I have investments in face. Patent risk is impossible to quantify. It's unrealistic for most small to medium businesses to have any clue which patents they are at risk over. Vringo's IP from the merger is the flip side of that risk and offers an imperfect hedge. So, I made the investment."

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