Today, 13 February 2018, IPH Limited (ASX:IPH) announced [PDF, 156kB] that it has acquired a 19.9% stake in Xenith IP Group Limited (ASX:XIP). It states that it ‘acquired its interest in Xenith at a price of $1.85 per share from institutional investors at a total cost of approximately $33 million which has been funded from debt facilities’, and that its purpose in doing so is ‘to participate in industry consolidation, consistent with its strategy to pursue acquisitions in the domestic market which are compelling from a strategic and financial sense.’ The immediate objective of the transaction, however, appears to be to try to block the proposed acquisition of Xenith by QANTM IP Limited (ASX:QIP), which was announced back in November 2018, and which is currently subject to a review by the Australian Competition and Consumer Commission (ACCC). At today’s opening price for QANTM of $1.51 per share, the amount paid by IPH for Xenith shares is almost exactly equivalent to the offer on the table under the proposed merger of 1.22 QANTM shares for each Xenith share. A bird in the hand being worth two in the bush, the ‘institutional investors’ must be delighted with the transaction. Whether IPH shareholders are as pleased with this imaginative piece of debt financing remains to be seen.
Xenith shares, on the other hand, leapt from a close yesterday (12 February 2018) of $1.40 to open today at $1.75 per share, before closing at $1.69. This jump followed IPH's notification to the ASX of its off-market purchase prior to the opening of trading, and is most likely a result of retail investors speculating on IPH's willingness to acquire further shares at around $1.85.
In its announcement, IPH explains that:
On the basis of the information released to date, IPH does not support the current Xenith scheme to be acquired by QANTM Intellectual Property Group Limited (“QANTM”) and does not intend to vote in favour of it.
IPH believes an alternative transaction involving a strategic combination of one of these businesses with IPH has the potential to create significant value. IPH intends to seek discussions with Xenith and / or QANTM in relation to an alternative transaction to the current scheme.
Commentary
Regular readers of this blog will know that my views on the structural changes in the Australian IP profession over the past few years have been cautiously supportive. I have, on a number of occasions, commented on the challenges faced by specialist IP firms in a difficult and largely stagnant domestic market, and I can appreciate that there is a need for at least some of the firms in this market to take decisive action to seek more substantial sources of capital in order to implement efficiency gains and generate new business opportunities. For all of these reasons, I have tried, wherever possible, to report on developments in what I hope is a balanced and objective manner.However, in this instance I feel compelled to be completely blunt, at least by way of an initial response. I think this move by IPH sucks. There are, according to the current Register maintained by the Trans-Tasman IP Attorneys Board, 100 registered patent and/or trade marks attorneys employed within firms in the Xenith IP Group. All of these attorneys, along with many other employees in various roles, would be perfectly justified in feeling that they have become pawns in some game being played by people whose concerns reside far from the welfare of people within the groups, or of the profession more generally. The 111 registered attorneys in the IPH group, the 100 registered attorneys in the QANTM group, and their colleagues in other roles within those businesses, might also be feeling uncertain about what all of this will mean for them. If I had not already quit over two years ago, I dare say I would be giving it very serious consideration about now.
Because here is what we know: prior to the announcement of the proposed merger between QANTM and Xenith, IPH – by its own admission, responding to ‘media speculation’ – had been courting QANTM with a view to a possible merger or acquisition; and now, in response to the planned merger of QANTM and Xenith, IPH has acquired a significant stake in Xenith – the company it was not courting – because, it would seem, this is the easiest way for it to obtain the votes it needs to try to stymie the merger that it does not want to see go ahead. This is not business. This is politics. And, while all is fair in love and war, the optics of this move by IPH are not great. Clients of firms within the listed groups are likely – quite rightly – to wonder what all of these Machiavellian machinations will mean for the services they receive, and the trust that they place in their service providers who, with the best will and intentions in the world, increasingly look like the playthings of the puppet-masters in the boardrooms of their listed-company owners.
In various fora, and at many events that I have attended over the past couple of years, I have found myself regularly trying to be a ‘voice of reason’ in conversation with people whose attitudes to the changes in the Australian IP profession have been overwhelmingly negative. In light of these events, it is going to get much harder to do that. There are, increasingly, perfectly sound reasons to feel negative about what is happening.
One thing is for sure, the Annual Conference of the Institute of Patent and Trade Mark Attorneys of Australia (IPTA), at which I will be speaking this year (although I am not an IPTA member) is going to be very interesting!
Correction: An earlier version of this article questioned the jump in Xenith's share price prior to publication of its announcement, failing to note the earlier filing by IPH of a notification with the ASX. My thanks go to a reader who contacted me to point out the additional context.
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