Peter Kafka

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Tim Armstrong Sells His “Beachfront Property”: Microsoft Buys 800 AOL Patents for $1 Billion

Turns out AOL’s patent portfolio was as valuable as Tim Armstrong said: Microsoft is buying 800 patents from the Internet company for $1 billion.

This is the portfolio that Armstrong has been shopping privately and publicly, and which he described as “beachfront property in East Hampton.”

AOL says most of the cash from the sale will be returned to shareholders, which may or may not satisfy critics like Starboard Value, who have been urging the company to profit from its patents.

Patents have become a huge issue for most of tech in the last year or so. In the mobile handset world, control of patents has sparked an expensive arms race that has prompted Google to drop $12.5 billion on Motorola Mobility. Meanwhile, Yahoo, which is under even more pressure from shareholders than AOL is, has entered into an ugly court fight with Facebook over competing patent claims.

AOL doesn’t break out which patents it is selling to Microsoft, but observers looking at the portfolio have pointed to important patents in areas like instant messaging and email. AOL will hold on to another 300 patents that it says cover “core and strategic technologies.” The deal also includes the sale of “the stock of an AOL subsidiary” that AOL will book as a loss in order to reduce the taxes on the portfolio sale. AOL won’t tell me what that subsidiary is, so if you’ve got suggestions, I’m happy to hear them.

Update: Solved – Microsoft is buying Netscape, or at least the underlying patents for the once-famous browser.

Assuming the deal passes muster with regulators, it should close by the end of the year.

AOL to sell more than 800 patents to Microsoft; Microsoft to license more than 300 additional patents and patent applications from AOL
Transaction is tax-efficient for AOL
Upon closing, AOL expects to return a significant portion of the proceeds to shareholders
NEW YORK, NY – April 9, 2012 – AOL Inc. (NYSE: AOL) (the “Company”) today announced that the Company has entered into a definitive agreement to sell over 800 of its patents and their related patent applications to Microsoft Corporation (NASDAQ: MSFT) (“Microsoft”) and to grant Microsoft a non-exclusive license to its retained patent portfolio for aggregate proceeds of $1.056 billion in cash.
Following the sale, AOL will continue to hold a significant patent portfolio of over 300 patents and patent applications spanning core and strategic technologies, including advertising, search, content generation/management, social networking, mapping, multimedia/streaming, and security among others. AOL also received a license to the patents being sold to Microsoft.
The patent sale includes the sale of the stock of an AOL subsidiary upon which AOL expects to record a capital loss for tax purposes and as a result, cash taxes in connection with the sale should be immaterial. Additionally, AOL expects to utilize approximately $40 million of its existing deferred tax assets, representing approximately 20 percent of its total deferred tax assets, to offset any ordinary income taxes resulting from the license of its remaining patent portfolio.
AOL management and its Board of Directors intend to return a significant portion of the sale proceeds to shareholders and will determine the most efficient and effective method to do so prior to the closing of the transaction. Pro forma for the sale and license, as of December 31, 2011, AOL would have had approximately $15 per share of cash on hand.
“The agreement with Microsoft represents the culmination of a robust auction process for our patent portfolio,” said Tim Armstrong, AOL’s Chairman and CEO. “We continue to hold a valuable patent portfolio as highlighted by the license we entered into with Microsoft. The combined sale and licensing arrangement unlocks current dollar value for our shareholders and enables AOL to continue to aggressively execute on our strategy to create long-term shareholder value.”
“This is a valuable portfolio that we have been following for years and analyzing in detail for several months,” said Brad Smith, General Counsel and Executive Vice President, Legal and Corporate Affairs, Microsoft. “AOL ran a competitive auction and by participating, Microsoft was able to achieve our two primary goals: obtaining a durable license to the full AOL portfolio and ownership of certain patents that complement our existing portfolio.”
The transaction is expected to be completed by the end of 2012, upon the satisfaction of customary conditions and regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended.
Evercore Partners and Goldman Sachs acted as financial advisors and Wachtell, Lipton, Rosen & Katz and Finnegan, Henderson, Farabow, Garrett & Dunner acted as legal counsel to AOL in connection with the transaction.

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