Investing in a real intangible

It is generally supposed that, with most investments, the investor knows something about what they are getting — even if it is a highly complex financial instrument that is multiple derivatives away from a hard asset. Even in venture capital, there is an idea — not withstanding the fact that VCs will tell you that they invest in people not necessarily the idea. Now a new investment vehicle which invests in the pure intangible of the fund manager.
As the Washington Post reports The New Way To Make Deals: Blank Checks:

Also known as special-purpose acquisition companies, or SPACs, blank-check firms raise money by selling stock to the public and then scouring the world for businesses to buy. They are the current rage among dealmakers, but have drawn some skepticism from critics who say investors don’t know what they are buying when the SPAC goes public.
In many ways, blank-check companies are bets on the dealmaking prowess of their founders. In this case, investors are counting on the connections that Kemp, Aaron, Tavares and Cuomo bring.
“The more I looked at it, the more I realized that the potential for sports properties and entertainment in a global economy is huge,” said Kemp, who runs Kemp Partners, a Washington-based investing firm, and is chairman of Sports Properties. “SPACs are hot.”

The New York Time’s DealBook blog explains – Million to Burn, With a Catch:

Here’s how it works: Average Joe buys shares in an initial public offering for an investment company with no assets to speak of other than the pot of money from the I.P.O. The company’s sole mandate is to make one big acquisition. Average Joe has no idea what it will buy. And frankly, neither do the folks running the investment company. It’s a blind bet that the Masters of the Universe will live up to their name.

But, haven’t investors been doing that forever? Isn’t that what the “blind trust” is all about? And how many investors look beyond the historical rate of return in their mutual fund to analyze the portfolio?
Investing has always been about intangibles – especially that intangible of competency. The only question in my mind is not about the blind nature of the bet – but how quickly these things can blow up.

Patent reform update – about the bill

Last week, Senators Patrick Leahy and Orrin Hatch (the Chairman and Ranking Member of the Judiciary Committee, respectively) published an op-ed in the Washington Times – Meaningful patent reform. The piece defends their bipartisan work on the bill and ends with this:

As legislators, we know we are headed in the right direction when everyone is complaining that the entire bill is not going their way. We see this as a necessary, albeit somewhat difficult, part of the legislative process. But we welcome it. But at the end of day, we are confident that we will resolve the remaining issues in ways that should make everyone comfortable and will ensure final passage.
The Senate has a tremendous and historic opportunity — and a constitutional responsibility — to further strengthen our nation’s competitiveness through meaningful patent reform. Now is the time.

Sound like they are building the case for moving ahead soon. I hope so.

The downside of those financial innovations

Steven Pearlstein lays out the problems with the decade of financial engineering — – Time for Wall Street to Pay –

As the industry and its cheerleaders constantly remind us, these innovations have helped to lower the cost of capital and make the business sector more efficient and globally competitive. But what we are now discovering — or perhaps rediscovering — are all the ways in which all this glorious financial innovation has weakened the economy and the society it serves.
For starters, these innovations have helped to create a cycle of financial booms and busts that have a tendency to spill over into the real economy, contributing to a heightened sense of insecurity.
They have shortened the time horizons of investors and corporate executives, who have responded by under-investing in research and the development of human capital.
They have contributed significantly to massive misallocation of capital to real estate, unproven technologies and unproductive financial manipulation.
They have made it easy and seemingly painless for businesses, households and even countries to take on dangerous levels of debt.
They have given traders a greater ability to secretly manipulate markets.
They have given corporations clever new tools to hide risks, liabilities and losses from investors.
And by giving banks the tools to circumvent reserve requirements and make more loans with less capital, they have enormously increased the leverage in the financial system and with it the risk of a financial meltdown.
But far and away the greatest damage from all this financial wizardry is the obscene levels of compensation it has generated for a select group of Wall Street executives and money managers.
For when you look over the long term, at the good periods and the bad, it is obvious that the pay collected by these masters of the universe has been grossly excessive — out of line with the personal financial risk they have taken, out of line with their skills relative to the next-best performers and certainly out of line with the returns earned by investors.

So our task as we look to incorporating intangibles into the financial system is to avoid this pitfalls. It will be a challenge, to say the least.

Rethinking business method patents

From today’s Wall Street Journal — Court to Re-Examine Method Patents:

A federal appeals court in Washington has decided to reconsider the boundaries for so-called “business-method patents,” a controversial type of intellectual-property protection given to methods and processes used by insurance companies, banks and securities-traders, among others.
The Court of Appeals for the Federal Circuit, which hears appeals from lower courts and decisions of the Patent & Trademark Office, said Friday that it has decided on its own to hear the case en banc, or by all 12 of the court’s judges. In its order, issued Friday, the court stated it would re-examine a landmark 1998 case, State Street Bank v. Signature Financial Group, which largely paved the way for the creation of business-method patents.

This could dramatically alter the landscape. For a more detailed discussion, see the Patent Law Blog (Patently-O): Bilski: Full CAFC to Reexamine the Scope of Subject Matter Patentability.

The role of the global corporation – hyperpower glue?

I’ve just finished reading Amy Chua’s Day of Empire: How Hyperpowers Rise to Global Dominance–and Why They Fall. The thesis is that over the course of history, there have arisen a few “hyperpowers”–nations which overwhelmingly dominate the rest of the world at that time. The United States is the latest of these hyperpowers. Key to the rise–and fall– of these empires has been diversity and tolerance, especially in order to utilize and incorporate talent from subject peoples. In the case of the US, it is not the incorporation of subject peoples, ala the Roman Empire, but the openness to immigration which supplies this talent.
While she mentions at the problem of forging a unified identity, it is not until the end of the book that she get around to discussing the most important element – what she calls the problem of “glue.” In other words, for any of these hyperpowers to sustain themselves, there must be something that holds them together. In the case of Rome, this intangible was Roman citizenship. When this glue disappears, as the case of Indian leaders finally rejecting the British Empire after World War I, the empires crumble.
The challenge facing the US, as she sees it is maintaining some glue. This is especially problematic as components of the American hyperpower system are outside of our boundaries. Unfortunately, this is the weakest part of the book. One suggestion she raises is that multinational corporations and outsourcing are really a form of glue:

The most successful hyperpowers of the past invariably found ways to co-opt and enlist the services of local elites, providing these elites with a stake in the hyperpower’s success and a sense of identification with its institutions. This “glue” was essential to their strength and longevity. America, as we have seen, does not have a foreign legion or civil service that it can staff with native-born populations. It does, however, have Google India and Microsoft Ukraine, which can serve as twenty-first-century analogs. If America cannot give foreigners prestigious governmental or military positions-as Rome and, to some extent, Great Britain did–it can give them prestigious and lucrative positions in its corporations.
Not every outsourced job will produce the “glue” that America needs; it is much debated whether low-wage garment workers at American-owned factories in Guatemala feel on the whole stronger or weaker ties to the United States as a result of their employment. But for those foreigners who obtain well-paid jobs in American-owned enterprises, and especially for those who become managers and executives, U.S. multinationals can unquestionably provide people outside the country’s borders with a sense of gain from America’s prosperity, a real stake in America’s continued growth, and an affiliation with America’s institutions. It is no coincidence (although other factors of course contribute as well) that India, one of the chief beneficiaries of U.S. outsourcing, is also one of the few countries in which popular attitudes toward America have remained strongly positive.
(Days of Empire, p. 340)

This raises an intriguing question, however. Multinational corporations are attempting to shed their “multinational” identities, which still imply home and host nations. They are rapidly becoming (or trying to become) “global enterprises. Or at least formerly US based companies are seeking this path. As Sam Palmisano, CEO of IBM recently put it in a Wall Street Journal interview “Spinning a Global Plan”, “If you’re going to be a global entity, you don’t want to be viewed as a foreign multinational.”
This is not to single out IBM. Few US-based companies have worried more about and done more to promote US economic competitiveness. But IBM sees itself as naturally evolving into a global enterprise.
If this is the direction corporations are headed, what is it that they supposedly are holding together when they act as glue? Does the Indian programmer who becomes an IBM manager gain a sense of sharing in American prosperity or IBM’s prosperity? Does the Germany manager gaining a taste for that American institution, the Super Bowl, rather than the World Cup? Are the emerging global enterprises the glue that holds the American hyperpower together? Or are they, as the critics of global capitalism and the multinational companies might claim, themselves the next hyperpower?
I don’t have the answer to these questions. And I don’t know if companies could even play any role as a hyperpower. I do know that there is more and more concern about the nexus of corporate and country interests. Just yesterday, in two separate meetings on two separate economic topics, someone raised the issue. Clearly, no one believes the old saying “what is good for GM is good for the US.” It may not have been really true when it was first uttered. But it typified a more nation-based corporate mindset. That mindset is long gone – for good or ill. In its place is something we have yet to truly understand.
Ms. Chua’s book touches upon this topic in an interesting way. Having laid out this interesting thesis, I hope she will take the next step in her analysis. Otherwise, I’m afraid that her thesis may have been overtaken by the changing reality.

A city of two tales

Interesting juxtaposition of stories today on the latest economic development report card from Silicon Valley. Here is the Wall Street Journal, stressing the economic recovery of the area, in part due to more attention to alternative energy industries–Silicon Valley Continues On Economic Comeback:

Silicon Valley continued its economic revival last year by adding nearly 30,000 jobs and raising its median income levels, but the nation’s technology capital is experiencing some instability as the national economy struggles.

And here is the story in the New York Times — Silicon Valley Losing Middle-Wage Jobs:

Silicon Valley is in danger of creating its own digital divide.
The California region is losing its middle-class work force at a significant rate, according to an annual report that tracks the economic, social and environmental health of the region that is the nation’s technology heartland.

Note: both stories talk about the difficulty of middle-income workers in the area and about the economic vitality of the area, due in part to investments in “clean tech.” So, you may want to read the report — Silicon Valley Index — for yourself.

Securitization on hold; licensing moving forward

Speaking, as we have been over the past few weeks & months, of turmoil in the financial markets, here is an example of why we need efforts to calm the jittery markets. While the monetization of an intangible asset may have boosted a presidential candidate (see earlier posting), at least one intangible securitization deal is on hold. Last year, when the private equity group Terra Firma bought out the record company EMI everyone expected that the EMI music catalogue would be securitized. Terra Firma would sell bonds backed by the future royalty rights in order to pay for the acquisition of EMI. Earlier this year, however, the Time of London reported that this plan is on hold (see Trouble at EMI – Times Online). The reason: a frozen market.
However, last week EMI announced it is going ahead with another monetization option: licensing. As reporting in the Telegraph

EMI has struck a deal with London-based Ricall, which is poised to launch several EMI websites around the world allowing music-hunters to license its music much more easily.

This is a consumer not buying a song; this is selling the rights to use a song to advertisers, TV producers and computer games makers. It is exactly the type of revenues which would have been used to back the bonds used in the securitization.
No, I am not advocating that we need to get the securitization market back on track in order to finance more leveraged buy outs. I am advocating that we need to get the securitization market back on track to open up a whole new way of financing innovation and economic transformation.
In large part, we also have to set new standards (see the Buffett posting earlier today) so that ordinary investors feel safe to get back into the water. Until we do that, intangible securitization will be a high-end investor’s game with the vast majority of investors (and companies seeking funds) locked out.
More on this later when we release our next Athena working paper: Monetization of Intangible Assets.

Update on copyright for fashion design

In a number of earlier postings, I raised the issue of copyright for fashion designs. Yesterday, the House Judiciary Subcommittee on Courts, the Internet, and Intellectual Property held a hearing on the topic. According to Women’s Wear Daily:

A bill that would put more teeth into copyright protection for fashion designs that is trumpeted by the Council of Fashion Designers of America has been stuck in committee because of industry infighting. On Thursday, the pro-and-con cases were presented before a House committee by Narciso Rodriguez and the owner of a California apparel firm, respectively.
The CFDA is trying to bridge the divide with the rest of the apparel industry and has held discussions with the American Apparel and Footwear Association for over a year, according to the designer and written testimony from Kevin Burke, the association’s president and chief executive officer. The AAFA represents most of the industry’s major brands and companies.
Rodriguez, who claimed knockoffs of his designs take away millions of dollars a year from his business, told lawmakers he is “hopeful” the two associations will reach an agreement within a month on the language of the bill regarding the scope and risk of litigation.
. . .
But the bill’s opponents argue that inspiration will be stifled by such legal restrictions, leaving thousands of companies exposed to frivolous lawsuits that could drive them out of business.
Steve Maiman, co-owner of Stony Apparel Corp., a moderate women’s and children’s apparel manufacturer based in Los Angeles, carried the flag for those in the industry who oppose the bill.
“Extending the copyright laws to the fashion industry is thoroughly a bad idea,’ said Maiman. “The bill is misguided and unnecessary, for several reasons.”
Maiman told lawmakers the fashion industry has thrived without “help or interference” from this type of copyright law. He argued that it is “impossible to determine the originality of a design because all designs are inspired by existing designs and trends.”

No word on whether the legislation will move anytime soon. According to the WWD story, “The subcommittee is expected to wait to see if the CFDA and the AAFA can reach a compromise on the acceptable language in the bill before voting whether to move the legislation.”

Back story on patent reform opposition

Earlier this month, I posted a piece on the prospects for patent reform legislation. That piece (from IP Watch) noted the Commerce Department’s problems with the pending patent reform bill. Here is the back story of one provision that triggered those concerns — Lawmakers Move to Grant Banks Immunity Against Patent Lawsuit –

Sen. Jeff Sessions (R-Ala.) has sponsored an unusual provision at the urging of the nation’s banks granting them immunity against an active patent lawsuit, potentially saving them billions of dollars.
Adopted with little fanfare, the amendment would prevent a small Texas company called DataTreasury from collecting damages from banks for infringing on its patented method for digitally scanning, sending and archiving checks. The patents were upheld last summer by the U.S. Patent and Trademark Office after they were challenged.
The provision, passed without dissent by the Senate Judiciary Committee in July and inserted into legislation scheduled for a vote by the full Senate this month, is a rare attempt by Congress to intervene in ongoing litigation, congressional experts say.

The Commerce Department’s letter specifically opposes this provision:

Check Collection
The Administration opposes the bill’s provisions to limit remedies against financial institutions that use patented check collection systems, when such use would otherwise be patent infringement. Limiting patent holders’ rights and remedies in this instance could reduce innovation in this technology area. As a general matter, the Administration does not support exceptions to patent protection based on a particular technology.

The Post story cites banking industry claims that this is a case of a patent troll – hence the need for the legislative solution.
I don’t know the facts in this case. I don’t know if this is a patent troll or an inventor seeking redress (the story does mention that some banks have licensed the technology while others have not). I am also a strong supporter of patent reform. But this strikes me as the wrong way to go about it.

Wall Street Journal on McCain’s intangible loan

The editorial board of the Wall Street Journal has taken aim at John McCain’s loan on his donor list — (see my earlier posting – Presidential fundraising and intangibles).
According to the Journal’s editorial:

Though the bank could have conceivably sold or rented the donor list if Mr. McCain failed to repay the loan, the market value would have been significantly less than with the Senator throwing his political weight behind it.

The strong implication of the editorial being that this was ethically questionable.
Of course, the real reason for the editorial has nothing to do with lending on intangibles. It is just an opportunity for the Journal’s editorial board to tweak McCain about something they hate – campaign reform:

We’ll assume none of Mr. McCain’s fund raising is “influence peddling.” But imagine how much more open and transparent campaign finance would be if reformers like Mr. McCain hadn’t built our current maze of fund-raising and spending limits.

Open and transparent? You mean like the money bagmen from the good old days of unlimited and secret spending? Having to list something of value as collateral is, in my mind, a much more transparent system that the wild west of buying campaigns that the Journal seems to advocate.
At least the Journal recognized that the donor list was of some value. That is a step forward in understanding the importance of intangible assets.