AOL INC. (AOL)

[$UPERMAN]

3rd UPDATE: AOL Sells Patents To Microsoft In $1.06 Billion Deal

Aol (NYSE:AOL)

Today : Monday 9 April 2012

AOL Inc. (AOL) Monday said it agreed to sell more than 800 patents and related products to Microsoft Corp. (MSFT) for $1.06 billion, enabling the embattled online company to return cash to investors as it faces a boardroom showdown with an activist shareholder.
Shares of AOL surged as much as 45% Monday, hitting their highest point in nearly 1 1/2 years, because the company pledged to return a "significant portion" of the sale proceeds to shareholders.
The move comes as activist shareholder Starboard Capital, which owns around 5.2% of AOL shares, is mounting a proxy campaign to win seats on AOL's board. The firm has criticized AOL for not doing enough with its intellectual property and for investing too much in online content that isn't generating enough advertising revenue.
Starboard has suggested that AOL consider selling assets like Moviefone or MapQuest to generate more value.
"The deal creates a cash infusion and, in some ways at least, buys a little time for management to reposition AOL," said Steve Beck, a brand consultant for technology and other big corporations. "But the fundamental issues remain the same."
A representative from Starboard declined to comment on the deal Monday.
AOL didn't announce how it will distribute the money--saying it will do so before the close of the transaction, which is expected later this year. If the deal had been done at the end of 2011, it would have given AOL about $15 a share in cash, the company said. The stock closed Friday at $18.42.
AOL also didn't detail the patents sold, although Chief Executive Tim Armstrong recently referred to them as "beachfront property in East Hampton." A person familiar with the matter said the patents include the intellectual property to Netscape, although AOL will retain the Web browser's brand name and operating system.
In general, the value of patents can fluctuate and be arbitrary, and analysts weren't as confident in AOL's particular portfolio. The patent-advisory firm M-Cam Inc. had valued AOL's holdings at $290 million in March.
"Most on the Street viewed $300 million as the likely maximum value," Benchmark analyst Clayton Moran said. "Relative to this expectation, AOL has created $7.63 per share in stock value."
AOL shares closed up $7.98, or 43%, to $26.40. Moran said a one-time cash dividend "would be appropriate after the close of the deal."
Starboard previously estimated AOL's Internet patents could generate more than $1 billion in licensing income "if appropriately harvested." Under the agreement announced Monday, AOL also received a license to the patents being sold to Microsoft. Those terms weren't disclosed.
Microsoft had no further comment beyond the press release. The sale also includes a nonexclusive license for Microsoft to AOL's remaining portfolio of 300 patents, which include those for advertising, search, content generation, social networking and mapping technology.
Microsoft shares fell 1.3% to $31.10 during a broader market selloff.
AOL said it didn't anticipate paying significant taxes on the deal, which will be booked as a capital loss. It also plans to use $40 million in existing deferred-tax assets to offset any ordinary tax liabilities that would arise from licensing the rest of its patents.
Big media companies are aggressively putting excess cash to work for their shareholders in an effort to boost their market value. News Corp. (NWS, NWSA, NWS.AU), which owns Dow Jones & Co., publisher of this newswire and The Wall Street Journal, launched a fresh $5 billion share-buyback program last year following its thwarted bid to acquire the remainder of BSkyB. Time Warner Inc. (TWX), the former parent of AOL, unveiled a new $4 billion stock-buyback plan in February.
Armstrong previously said the company made a point of securing the patents from Time Warner when AOL was spun off from it in 2009. The company began taking a close look at the assets in September, hiring Goldman Sachs Group Inc. (GS) and Evercore Partners Inc. (EVR) to advise on the sales process.
-By William Launder, Dow Jones Newswires; 212-416-3412; [e-mail]
--Kristin Jones contributed to this article.