A bizarre love triangle! QANTM courts Xenith while IPH waits to swoop.

Hello

Well, World Taekwando Federation as my sons would say (aka WTF)…

There I was happily typing up my summary of IPH’s strategy in light of my previous three posts when out of the blue QANTM IP and Xenith IP announce their intention to commence a “merger of equals” (or really approximate equals as QANTM will be 55% of the merged entity and Xenith 45% of the merged entity). https://www.asx.com.au/asxpdf/20181127/pdf/440nl9wzd8vx4l.pdf

I was busily and enjoyably speculating which high scoring scrabble letter would be used for the merged entity – a “J” (Jumanji), or “Z” (Zenith, spelt properly this time) – when…

On the same day, IPH announce their intention to acquire QANTM IP for a cash and scrip offer.  https://www.asx.com.au/asxpdf/20181127/pdf/440npnf1t2hs83.pdf

QANTM deny the IPH offer is serious.  https://www.asx.com.au/asxpdf/20181127/pdf/440nxqykt65vqh.pdf

IPH tell the market the offer is serious 90 minutes before the QANTM AGM.  https://www.asx.com.au/asxpdf/20181129/pdf/440s7m9fwj1zfq.pdf

Then at the QANTM AGM, the Chair says the offer from IPH was not serious but they would be prepared to consider a serious offer.

QANTM then reiterate that the IPH offer is not serious and the “merger of approximate equals” is the way to go.  https://www.asx.com.au/asxpdf/20181129/pdf/440sqys8bwqm38.pdf

World Taekwando Federation

So, what is going on.  Who knows?   There is clearly a lot yet to play out in the whole QANTM, Xenith, IPH saga.  But what I can say is this…

This is a very smart play by IPH…

Why?

Because QANTM and Xenith are both coming out of a hole.  For different reasons, each has been internally focused and distracted  – QANTM because it is going through a series of cost cutting initiatives and Xenith because it is dealing with the after effects of the acquisition of Griffith Hack, the sort of indigestion I would suffer if I sat down and ate an elephant.  In addition, the overseas originating patent filing market has been soft for the past 18  months or so.

However, both of these companies are beginning to turn around.  Filings into Australia are increasing.  Their financials are looking healthier.  Their restructuring programs look like they are bearing fruit.  QANTM is starting to pick up business in Singapore and has acquired a Malaysian practice.

In terms of IPH’s business model – providing patent services across the Asia-Pacific region (and potentially other regions)  – QANTM is a potential threat.  Not a big threat, mind, as it does not presently have the scale or reach of IPH in the region but a potential threat.  It is at least physically present  in the region and running patent attorney businesses there.

Unlike every other firm, with the exception of IPH (and Xenith) , QANTM also has the benefit of being a listed entity and therefore able to access capital to expand into Asia.

Merging with XIP increases that threat as it provides better scale and also clients that file into Asia – for example, XIP through Griffith Hack acts for Colgate Palmolive who use them as a regional hub for all Asian filings.  If the merged entity capture the revenue from these filings in their own Asian subsidiaries rather than paying agents then that is a very useful resultant synergy for the two companies.

If IPH acquire QANTM, that threat goes away before it really has a chance to get going.  In addition, if IPH acquire QANTM they obtain a very profitable business that fits easily into their model.  It might even be at a price that is relatively attractive given expectations of QANTM’s future revenues and profitability.

There would be regulatory implications as the combination of IPH and QIP would have a large share of the patent market in Australia – larger than the QANTM/Xenith entity.  However, this might be a risk that IPH is prepared to take   If the merged entity results in competition law issues, perhaps there are ways to deal with that including divesting one or more parts of the business.

But even better than that, IPH does not need to acquire QANTM to obtain a useful result.  If they can muddy the waters for the QANTM/Xenith merger then that provides its own benefits as QANTM/Xenith shareholders and board members are left weighing up a number of competing offers – a very distracting process – rather than having clear air to progress the business plan of the merged entity.

This is not to make a call on the merits of the IPH offer.  IPH shares are liquid and cash is cash.  If you are looking for an exit, this has its attractions when compared to dealing with the shares of a merged entity that does not have the track record of IPH.  There are difficulties and complexities associated with what is publicly known of the QANTM/Xenith merger which I will look to comment on in my next post.  I am simply saying that this is a good move by IPH and reflective of a company that understands the listed space.

We have not yet seen the end of this bizarre love triangle.

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