Good afternoon, everyone. Jeff Elliott with Three Part Advisors. Thanks for joining us. Our next presenting company is Acacia Research. Ticker is ACTG. With us here from the company, we have the CEO, MJ McNulty. If you guys were in lunch, this was one of the names that came up in the panel, so we're happy to have them here today and look forward to the presentation. With that, I'll just turn it over to MJ.
Thanks, Jeff. Appreciate it.
Thanks for joining us, and thank you to [Zeke] for giving our pitch. I think we can keep this short. We are Acacia Research. We have a handful of members of our team here. Here are just some key stats: book value of about $577 million, 96 million common shares outstanding, book value of $598 million, and a market cap of $313 million. We are a small-cap, microcap company. To touch on what we do, what we really are doing is very similar to what you all are doing. We are building a business and a public structure as value investors. We focus on B and C quartile assets, things like Deflecto, things like Printroducts, where we can go in and buy it with a really nice margin of safety, put our operating partners on top of that, and then create a much better business.
Unlike a private equity fund, we can own that business in perpetuity. We are ultimately allocators of capital. We will sell things when it makes sense to sell things. Our vision is to buy a company that has been under-loved, under-managed for a long period of time, buy it at a price where we feel like we have a really good margin of safety so that if something goes wrong in these businesses or the turnaround takes longer, we still are making money owning that business, and ultimately ending up with great segments and great businesses that generate free cash flow and earnings growth that have the ability for additional M&A. That is really what we are trying to build here. This slide just kind of outlines our process, but it is probably very similar to the process that you all use in evaluating your investments.
We take it really seriously, and we consistently work on improving it, but sticking to the process every day and every investment, sticking to our knitting and our thesis is very important to us. Just to give you a sense, because I think there's a little bit of misconception about Acacia and what Acacia is, we were a patent troll back in the day, but we've evolved quite significantly since then. Our team kind of took this business over in 2022, and we had the patent business, and we had some biotech assets, and we had a bloated cost structure, and we had processes that did not work. Our team rationalized the business, started with a corporate cost structure, took that down to a level where we have it today, and we've been very consistent at keeping it there.
We were able to create some liquidity out of some of the biotech positions. We still have two that we're working on getting liquidity out of. Once we were able to get the business into a position we wanted it to be in, and we had our processes in place and team in place, we started focusing on building the business or acquisition. The first acquisition we did was Benchmark Energy. This is our oil and gas field in the Panhandle of Texas. We acquired a 51% stake of a small field in 2023. In 2024, when we were comfortable with that field and we were comfortable with the team with whom we'd had a prior relationship, we did a much larger deal. We actually bought our partner's prior business back from a private equity fund.
This was a time when oil and gas was out of favor, which is hard to remember because it feels like it's much more in favor now than it was. We priced it at an out-of-favor type price. We probably paid PV-18, PV-19 for the reserves that we bought. What has happened since then? We are very operationally focused. Our team at Benchmark is very operationally focused, was able to take these wells, increase production from the existing wells, recomplete wells, change lift, and increase the reserve base or keep the reserve base flat despite the production that we had. In addition to the existing production that we paid for, we also got some land in a play called the Cherokee Play. We thought it was interesting. It was kind of quiet. Some people were poking around it. We got it for free, effectively, with a transaction.
Now the Cherokee has actually become really interesting and really exciting. It's a majority gas and liquids rather than oil. The oil price environment's not as constructive, we think, as the gas and liquids environment is. There are a lot of rigs that are now running in the Cherokee. We've taken that position, and we've done some lease swaps. We bought a little bit of acreage, and we put really interesting blocks together so that we can run a very small drilling program with partners to take advantage of the position that we have in the Cherokee. We've been able to buy business at a high discount rate. Discount rates have come in. We've been able to unlock, or we're in the process of unlocking value, both in the existing assets that we bought and assets that we got for free.
This is kind of what we look for when we look for investments. We're pretty excited with the Benchmark acquisition. We've also returned capital to shareholders over that time. I get a lot of questions about buybacks. We are managing where we are on buybacks with change control issues that we have that will lapse at some point. Between that and the buybacks, we then went out and did another acquisition. We bought a business called Deflecto just about a year, a little over a year ago. Same thing. This is a B and C quality asset owned by a private equity fund that was under-loved and under-managed for many, many, many years. We bought the entire business at, call it five and a half times, kind of a mid-cycle.
EBITDA, we think the value in this business, two of the businesses that we own there are worth significantly more than five and a half times. The other one's probably worth five times, but much smaller. Again, find something where we have a lot of margin for safety, have an operator against it, execute against a very operational, heavy turnaround business improvement initiative, and then ultimately see the benefit of that. Where are we with Deflecto? We had some tariff-related demand issues there. There's a leverage to the Class 8 market. In response to that, we've really accelerated headcount reductions, facility consolidations, process improvements so that when we come out of that cycle, we think this business should do very, very well. That's the transportation piece. On the air distribution piece, we think that that business has been great. It's a nice building products business.
It has consistent growth associated with it. It is very niche and has high share in the markets that it participates in. These products are all, they are necessary. They are low-cost, necessary, high-risk of failure products. Again, look for value where others are not looking for value. Put a very heavy operational angle in place once we own the business, and then stick to our process of operationally improving it. We also had announced, I think at the end of the second quarter, a partnership with a business called Unchain. We had a lot of questions about this. I think a lot of people thought we were turning into a Bitcoin treasury business, which is exactly not what we are doing. We have a lot of cash on our balance sheet.
As we look for risk-adjusted returns, we partnered with a business called Unchain that underwrites commercial recourse business loans to borrowers that can pledge Bitcoin as collateral. We hold the collateral. We lend at, call it a 12% rate gross, 12%-13% gross. We pay about 150 basis points in fees. We have effectively an asset-based loan where we control the collateral. We view it as a great cash management option and an ability to generate excess return over our cash and treasuries. Everything that we've done there, we've done starting with about $350 million in cash and securities and ending with about $330 million in cash and securities.
If you invested in the business when we took over versus now, we've added Benchmark, we've added Deflecto, we've turned around our Printroducts business, and we've added these unchain loans while buying back stock and still ending with roughly the same amount of cash. This just gives a little bit, sometimes it's easier to put our holdings in a picture so that people can get a sense of what we own. This kind of goes through in a picture: Benchmark, Deflecto, Printroducts, and then Acacia, our original intellectual property business. One of the things that I like to think about, and we think about when we're underwriting, is let's not think about what the exit value of a business is. Let's think about that, but let's also think about what we're getting paid to own the business.
Today in Benchmark, I think we're at high teens type cash returns or cash yields on our investment. In Deflecto, despite the headwinds, we're at like 8%-9%. In Printroducts, we're in kind of the high teens as well. Our portfolio is generating really good cash-on-cash returns for the investments that we've made without provisioning in some exit value. I'm going to call this slide forever the Ginsu slide now because this is effectively [Zeke's] pitch, which is you get the operated segments, you get cash and other assets, and if you subtract the parent costs from that, I think there's a lot of equity value in the business in spite of the just on a book value standpoint, not including where we think the actual value of the assets might be because of the margin of safety that we price into our deals.
This is kind of the key takeaways, which I think you probably all got from the presentation and some of the things that [Zeke mentioned. One of the slides that we're really proud of, and one of the reasons that we didn't start going on the road and talking to investors until we were able to show some of these data points, we like to look at the bottom left graph on this slide, which are parent costs. As I mentioned, when we took the business over, we rationalized all the costs and built the parent cost structure up from a zero base. What do we need and only what we need to run the parent company, and how do we keep it as flat as possible?
This is super important for us because this is how you all make money, which is the flow-through of the EBITDA from the businesses that we own relative to our parent costs. On the upper right, this is a quarterly rolling LTM view of how EBITDA has grown since this team started managing this business. As you can see, we're generating EBITDA well over our parent costs. Our parent costs are staying pretty flat. Any incremental improvement in the operating performance of any of our businesses, organic growth, M&A, or M&A in a new platform continues to scale this number quite significantly with high earnings flow-through. I think that's kind of the story. I'm happy to take any questions.
[audio distortion]
Yeah, that's a great question. I think there's a distinction. It looks like a private equity fund. We're private equity and public markets guys.
There is clearly a component of it. I would say we approach things as financial investors, not necessarily as corporate investors. Our focus on capital allocation may be different. We can sell a business without worrying that it risks our jobs to sell the business. We're not tied to any one of our businesses. We love them all. We work on them really hard, and we are invested in them. In private equity, the differences are more in the nuances, which is if this were a private equity fund and you all said, "Hey, team, we love this business," we do not ever want you to sell it. If we were in a fund, I would have to say, "You know what?
I have to sell it. Probably the businesses you love best, I have to sell the earliest because I need to go raise the next fund. I need to return money to LPs. In this vehicle, rather than being an LP or a shareholder, if you say, "Hey, I don't really like what you're doing," you can just go sell your stock. "I do really like what you're doing." You can go buy the stock as opposed to going to a private equity fund and making a 10-year commitment when you don't know when you're getting your capital back. There is a structural difference between the two. Despite the operating looking the same, the structural differences are very significant.
I'm just curious, how do you orchestrate the incentive structure in [audio distortion]
Yeah. Short-term is standard-based bonus. Long-term is tied to metrics of business performance.
Right now, it's growth in book value, it's growth in the value of the assets. We don't have a carry structure, but we do have a carry-like structure that incentivizes us to grow the value of the assets. Obviously, it prevents us or incentivizes us not to make bad investments. Back to the private equity point, we're not putting money out because we have a target on our back and just doing what we can. We're buying businesses that we and we're buying B and C quartile businesses. These are businesses that need work. We're buying and picking the best ones that we can find where we can align the best talent with that particular business model so that we can create value out of it.
Yeah. Where do you find some of the processes that you're helping with?
Is there some of the focus is obviously that. I'm wondering if there's more taking the narrow area out. How do you prioritize those steps?
Yeah. Look, this is a question we get a lot. I think that there is no kind of magic bullet to answer that question. I think there are, I think that our name has showed up on your all screens for many years, and there are certain things that may have left a bad taste or a bad impression in people's mouths, which I think is unfortunate, but it's just the situation. Our team, it's a new team. We want people to understand that there is no carryover from the prior team. This is our strategy. We're executing against it.
By the nature of what we're doing, I think the upside leverage from the turnarounds is very high, but I do think that that takes a little bit to play out. It's not a two, three, four-quarter thing, but it's probably these turnarounds take 12 to 18 months before they take root and really start to show up in the numbers. I think, and you all may tell me differently, if we continue to follow our process and put our heads down and continue those two graphs where you've got limited growth in the parent costs and you've got continued growth in EBITDA, and we get out and market ourselves more, which we haven't been doing until we've had data points to talk about, I think we're going to start getting more traction in the investment community. Go ahead, [Zeke].
I'm just going to kind of address Starboard's history with that ownership.
Yeah. Starboard entered this intentionally. The world is littered with examples of lenders or hedge funds or others ending up with a business that they didn't intend to own. Starboard entered this with the intention of building this strategy. I can't speak for them, but what I can say is I think they find this very interesting. They started their fund in this size of companies, and they were successful in this size of companies. As funds get larger, they have to go after larger targets, and the strategies change, and the targets change, and their return profile is still good. Return profiles tend to change when you go larger and larger.
At our size, Starboard sees what they probably used to be able to do, which is have an activist campaign against a microcap or a small-cap company. Now with a little bit more of the Elliott model of, "Well, we really like the business. Maybe we're making progress trying to change it at the board level. Maybe we're not. Why don't we just buy it?" I think they look at us and say, "Well, you guys are private equity guys. You know how to transact in the private markets. You know how to own a business and not just own stock." It's pretty exciting. We see all these businesses that are small and microcaps that shouldn't be public. There's a value trap somewhere in it.
Some of the parts that can't get unlocked by the existing team, operational enhancements that can be made that the existing team's not doing. Why don't we just buy the business and do that as opposed to trying to influence it from the outside or from the boardroom?
Our take on some of this already. You said it's quite a business that is complicated. What are the other metrics that you're looking at before you buy?
Yeah. When we look at a business, we're less focused, although we do run it on a five-year LBO model basis, typical returns modeling. What we really look at and focus on is what are we making from an earnings and a cash yield every year that we own the business. Part of the reason we do that is because we're very judicious with leverage.
have all lived in five- to seven-times leveraged environments in private equity, and sometimes it is very helpful. There are a lot of businesses that can support that type of leverage. In a turnaround, there is a ton of operational leverage in it. The financial leverage becomes less important. As a public company, but also as investors in businesses that we think we are getting a nice margin of safety on, we really focus on limiting the amount of leverage. There is kind of an optimal amount of leverage for these businesses, and our historical math is in the two and a half, two- to three-times range. We really look at the unlevered and the levered cash flow returns that we are getting so that we are getting paid what we want to get paid to own the business, not to sell the business.
If we sell the business, that's great. We have better returns, but we're modeling what we get paid to own the business while we own it. That's probably the key thing that we focus on. We are looking at where are the cost savings opportunities, where are the commercial opportunities, your general underwriting standards. Thank you. Go ahead.
Are there certain difficulties that these other management have had which you can see and anticipate and see a path forward on? Is there a typical situation out there, or are they just more complex?
It's all nuanced, really. It depends on the industry. It depends on the team. We look at both public companies and private companies. Each have their own set of nuances with them.
Because there's microcap or what the private equity guys would call lower middle market or mid-market type businesses, they tend to attract, they don't get the talent that NVIDIA gets, right? They're just not large enough to get that kind of talent. We have a bench of operating partners, one that works with us on our team, and then an extended network around that that have run very, very large businesses, public, private, done turnarounds, are very operationally focused. In Printronix and Deflecto, in particular, the operating partner that's working on it, there's no way that those businesses would attract that level of talent to work on that business. Because he's part of our group, which has a much larger stable of businesses and the ability to grow even bigger, it's attractive for him.
When you put it all together, we can attract that type of talent, whereas any one of these individual businesses could not or would have a very difficult time attracting that type of talent. We think that's an advantage that we have in the market. We think it's an advantage we have relative to the people that we compete against for these deals. In terms of it's always easier to cost, right? Look at the margin. Look at the margin relative to peers. Look at the G&A in public companies. Look at the public company costs. There are all those things that are the easier piece. The nuance is how do you optimize the business after somebody's run it for so long? Are you comfortable taking it apart and rebuilding it the way it needs to be rebuilt?
The answers to that second set of questions is really what we understand in diligence and create a plan against. We kind of rack the opportunity set by easiest, it's kind of a dual rack. It's easiest to execute to hardest to execute, and then highest dollar value to lowest dollar value. Then we set up a list of priorities against the deal once we close it.