04 December 2018

Proposed Merger of QANTM IP and Xenith IP – Another Symptom of a Great Malaise in the Australian IP Services Market?

MalaiseOn 27 November 2018 QANTM IP Limited (ASX:QIP) and Xenith IP Group Limited (ASX:XIP) announced that they have entered into an agreement to merge through an all-scrip scheme of arrangement.  The merger is subject to approval by a court, and by Xenith shareholders.  If it goes ahead (as seems likely), each Xenith share will be exchanged for 1.22 QANTM shares.  Existing QANTM and Xenith shareholders will end up owning 55% and 45%, respectively, of the merged group, which will comprise five Australian specialist IP firms (Davies Collison Cave, FPA Patent Attorneys, Griffith Hack, Shelston IP and Watermark), along with IP valuation, innovation and advisory service provider Glasshouse Advisory (currently owned by Xenith IP) and Malaysian IP firm Advanz Fidelis (which was acquired by QANTM IP in June 2018). 

Based on the closing share price of QANTM and Xenith on 26 November 2018, the merged group would have a market capitalisation of A$285.2 million, which still places it well behind the original listed Australian IP group, IPH Limited (ASX:IPH), which had a market cap of A$1.11 billion as at close of trading on 30 November 2018.

An additional interesting piece of information to fall out of the QANTM/Xenith announcement is the fact that IPH had itself been courting QANTM with a view to a possible merger or acquisition.  In an ASX announcement on 27 November 2018, in response to ‘media speculation’, IPH confirmed making a number of approaches to QANTM on the basis of non-binding, conditional proposals, culminating on 20 November 2018 with a proposal with an equivalent value of A$1.80 per QANTM share (a notional premium of 37.4% over the A$1.31 at which QANTM shares were trading on that day).  QANTM countered by announcing that its Board did not consider this proposal to be in best interests of its shareholders, due to its ‘highly conditional’ nature and ‘significant execution risk’.

All this would appear to confirm something that I have long suspected – that the Australian market is not big enough to sustain three publicly-listed groups of IP service providers.  IPH obviously saw QANTM as a potential acquisition target, while QANTM clearly did not wish to be acquired on IPH’s terms!  Instead, QANTM and Xenith have decided that they will be stronger together than they are separately.

But why is it such a struggle for these groups to flourish in the Australian market?  One advantage of the public listing of these companies is that, through their annual reports, there is now far greater transparency than ever before in respect of the financial performance of IP services businesses.  In combination with publicly-available data on Australian filings for IP rights, this provides useful insights into where the revenues – and profits – are coming from.  I have looked at these numbers, and I am afraid that my conclusions are not rosy.  The Australian market appears to be stagnant, with firms struggling to enhance profitability.  Growth in the listed groups has come through acquisitions rather than genuine new business, with revenues per professional staff member being pretty consistent across the industry.  Low-value, transactional work, which ought to have the greatest exposure to competition and downward price pressure, continues to be significantly more profitable than high-value, bespoke services.  Yet, despite the obvious challenges and risks that these circumstances present, as far as I can tell firms are continuing to do the same old things that they have done for years, in terms of professional staff management and marketing, with the predictable result that nothing much is changing.

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