Desperate For Cash AOL to Sell Unused Patents to Microsoft

Story first appeared in The Wall Street Journal.

AOL Inc. agreed Monday to sell more than 800 patents and related applications, along with a nonexclusive license to its remaining portfolio of patents, to Microsoft Corp. for about $1.1 billion.

The news sent AOL shares surging as the online media company said it intends to return a "significant portion" of the sale proceeds to shareholders. The deal comes six weeks after activist shareholder Starboard Value LP, which is mounting a proxy contest for seats on AOL's board, highlighted AOL's patent portfolio as an "underutilized" asset and complained that the company wasn't acting to realize value from the patents.

At the time AOL said it had already hired advisers to realize the value of the patents. On Monday, the AOL Chief Executive  said that the deal with Microsoft represents the culmination of a robust auction process for our patent portfolio.

Assuming the deal had been done at the end of 2011, AOL said it would have had some $15 a share in cash on hand.

Shares of AOL surged 43% to $26.32 in early trading, while Microsoft slid 1.5% to $31.06.

The transaction is expected to close by year's end, and at that point AOL will have an announcement for shareholders on what the company will do with its cash.

Starboard has been critical of the strategy of investing heavily in online content businesses as a way of building up the company's ad sales. The investor, which owns 5.2% of AOL's shares, wants AOL to take action to create value.

In a letter to AOL's board in late February, it said it had heard from multiple parties specializing in intellectual property valuation who believed AOL's patents could produce in excess of $1 billion of licensing income if appropriately harvested. These parties had expressed severe frustration that AOL has been entirely unresponsive to their proposals.

Starboard was unavailable for immediate comment. The firm has nominated up to five candidates for election to AOL's board at this year's annual meeting, which is scheduled for June 14.

AOL hasn't said exactly what the patents cover, but the company noted that its remaining patents and patent applications include advertising, search, content generation, social networking and mapping technology.

The AOL spokesperson has said previously that the company made a point of securing the patents from Time Warner Inc. when AOL spun off from them, and that the company began taking a close look at them in September.

The race for patents has heated up in the tech space. Among other recent deals, Google Inc. agreed to acquire Motorola Mobility Holdings Inc. last year for about $12.5 billion, partly to secure its lucrative patent portfolio, and a number of bidders pursued Nortel Networks Corp.'s patents at auction as well.

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